Continuing on the topic of cost arbitrage, I was reminded of an article in Strategy and Business which was an interview with Fransico D'Souza, COO, CTS. During the interview Mr.D'Souza talks about the change is focus from Cost Arbitrage to Intellectual Arbitrage.

Excerpt from the interview:

"There's a phrase that's used a lot in our industry, which I don't like very much, which is "labor arbitrage", Labor Arbitrage is about the fact that its cheaper to do something in one part of the world more that in another part of the world, so you can arbitrage the labor rate. Of course, that's one piece of our equation.

But I believe that if you look out over the long run, the opportunity for global sourcing goes far beyond labor arbitrage. There are quality implications, there are speed to market implications, and those will wind up being just as powerful as, if not more powerful than, the simple labor arbitrage. Ultimately, its about how you get the best brains in the world working on your particular problem, because then you're building a stronger business.

When you're looking for an outsourcing partner, that's really, in my mind, what you've got to focus on. Its not that these guys are going to save me some money; its that they are going to bring the best brains in the world to solve my business problem. I call it "Intellectual Arbitrage." Intellectual Arbitrage is the idea that in knowledge or service intensive industries, there's an opportunity to apply intellect at price points that are not previously possible, in order to achieve dramatic business outcomes.

The winners in the future are going to be organizations that can figure out how to tap global talent pool and take advantage of that intellectual arbitrage.If you can figure out how to get a competitive advantage by tapping the best brains in the world for the particular problem or issue that you have, than you are going to come out ahead.

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Prashanth Rai