In late March, when Citigroup CEO Charles Prince visited India, his demeanor hardly showed the pressures induced by the massive global restructuring plan he was about to announce two weeks later. He had good reason: Citigroup’s Indian arm has been one of its strongest international performers and is increasingly becoming part of the solution as the corporation strives to cut costs and improve operational efficiencies. On April 11, Prince announced 17,000 job cuts as part of a restructuring program aimed at saving $2.1 billion this year, growing to $4.6 billion in 2009. In contrast, Citigroup is increasing its headcount in India.

Citigroup will move more than 9,500 jobs to lower-cost locations within and outside the U.S., and two-thirds of that will go through attrition. India is expected to gain 8,000 of those jobs, including a select but growing number of outsourced high-skilled functions. If that phenomenon gathers momentum beyond the financial services industry, the U.S. could lose far more jobs than previously predicted across the skills and wage spectrum. India Knowledge at Wharton spoke with Wharton faculty members to understand this emerging trend in global job shift patterns.

Citigroup’s Indian operation is getting busier by not just becoming a bigger back-office for the corporation’s global network; it is also growing rapidly within the country. During his latest visit, Prince told a group of 3,000 employees at a town hall meeting in Mumbai that India is the biggest driver of growth for Citigroup’s international operations that now account for 47% of its total net income of $5 billion in this year’s first quarter. He said that besides North America, Citigroup’s growth focus would be on India along with a couple of other countries.

How does all that alter prevailing perceptions of global job movement patterns? “In some ways it is the same problem that has been going on for generations, of manufacturing and blue-collar jobs moving out of the U.S.,” says Peter Cappelli, Wharton professor of management. “What’s different [this time] is these are the first white-collar jobs moving out [of the U.S.]. It does begin to give the lie to the promise of global trade that low-skilled jobs would go abroad, but the high-skilled jobs would expand in the U.S. That is the other part of this that has a lot of bite. The idea that globalization will divide neatly between high- and low-skilled jobs doesn’t play out any more.”

International Arithmetic

The international imperative was telling when Citigroup released its first quarter results last week. Its net income grew the most in Asia (excluding Japan) at 25%, compared to the U.S. (13%), Mexico (12%) and Latin America (11%); its Asian net income growth was also more than 12 times higher than its average for all international operations. Net income from its Japanese operations for the quarter fell 71%, while that for the EMEA group (Europe, Middle East and Africa) shrank 5%. For 2006, Citigroup’s Indian arm saw a 35% annual increase in total advances to $5.8 billion, while net profits grew 18% to nearly $170 million.

In recent years, Citigroup has tapped India for a range of high-end skills including research analytics, credit appraisals and a range of corporate advisory support services. Here, it is interesting to note that most of the 17,000 jobs Citigroup will shed are in its consumer finance and investment banking businesses. Citigroup is in the process of increasing its headcount of such highly skilled workers from about 600 currently, according to media reports.

Most of the jobs flowing to Citigroup’s Indian operations are likely going to its business process outsourcing arm Citigroup Global Services (CGSS), formerly called eServe. Sanjay Nayar, Citigroup’s country head in India, told bank employees recently that plans are to increase headcount by 200 a month at its outsourcing division, but that accounts for a high attrition rate too. CGSS currently has about 12,000 of Citigroup’s total of 22,000 employees in India.

“For Citigroup to do high-end work in India is a no-brainer,” says Ravi Aron, senior fellow at Wharton’s Mack Center for Technological Innovation. “Citigroup has been doing bond pricing and investment banking work in India for a while.” Aron has first-hand knowledge of Citigroup’s operations. Early in his career, in 1990, he joined Citibank’s product management group in New Delhi as a management associate, moving later to Chennai in its operations and technology group. He recalls that even in those days, “it was one of the most automated companies going outside the tech industry,” and was one of the most sought-after employers on India’s business-school campuses.

Knowledge Continuum

Aron says India is a market for not just sourcing services, but is also one with a demand footprint. “It is not an accident that Citigroup was one of the earliest in India and has a big footprint,” he says. He talks of the “knowledge continuum” in outsourcing, where work moves from routine “data creation and validation work” to “working with information,” and then on to work that calls for “judgment, expertise, inference and interpretation.”

In the initial stages, much of the outsourced work was at the “data level,” says Aron, adding that the business model matures as companies get accustomed to working with their offshore partners and “see that there is a lot more they can do.” That opens the possibilities of outsourcing higher-end assignments such as bond pricing, equity research and financial market analytics. Citigroup internationally was one of the earliest to source back-office work from India in the latter half of the nineties, which was also when it formed its eServe subsidiary, Aron recalls.

Cappelli explains it isn’t just the advances in communications technology per se that are driving this trend. “We’ve had international phone systems for a long time. It’s the fact that work migrated to be done on IT systems and there was this standardization of IT that came about,” he says. “I don’t think it was easily predictable that things would play out this way.” Cappelli believes what’s driving these trends is not just a single piece of technology “but a bunch of technologies, and then a convergence on the standards for technology, and then a movement of work onto the technology in particular ways.”

Herd Instincts

Could other companies follow Citigroup’s example by moving jobs across the skills spectrum to low-cost destinations? Aron believes that chances are high that this could happen. “Other retail banks like JP Morgan Chase and Lehman saw what Citigroup had done [in outsourcing], and they are all coming into India now,” he says. “If you can run a center in India that is doing working capital management and treasury services for Indian clients, you can now create a high-end back office on a much larger scale and deliver those services to global clients.”

According to Cappelli, “Almost everybody expects that this will expand. The question is whether it will continue to expand at the same rate and there will be a paradigm shift, or whether it’s playing out more or less as the same story we’ve seen for a while. I don’t think we know that for sure.” What’s more, Cappelli argues that Citigroup could well be the bellwether of such trends. “There are companies that will follow them simply because they are doing it,” he says. He suspects other CEOs will look at what Citigroup is doing and say, “Well, we ought to take a look at that, too.”

It is possible, Cappelli says, that Citigroup could end up pulling back from its job-shift plans, and other companies will do so as well. “But part of the problem is companies do so much to cover up their failures that even when a company does something that doesn’t work, it’s hard to actually find out about it because nobody writes about it,” he says. “Their PR departments don’t issue big statements saying they decided to cancel [a project or initiative] because it wasn’t working for them.”

Revising economic theories

On March 28, The Wall Street Journal wrote about an about-face by Princeton University economist and former Federal Reserve Board vice chairman Alan S. Blinder, who six years ago described himself as “a free trader down to my toes.” These days, the paper wrote, Blinder “is saying loudly that a new industrial revolution — communication technology that allows services to be delivered electronically from afar — will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two.”

Blinder believes “the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge,” the Journal reported. He would like the government to do things beyond worker retraining, including considering tax incentives for companies creating jobs that stay in the U.S. “Mr. Blinder says the focus should be on jobs with person-to-person contact, regardless of pay and skill levels — from child day-care providers to physicians,” the Journal added.

Before one begins to revise theories of globalization, Cappelli says his questions are about the time period over which these job shifts will take place. “The free trade guys believe that eventually economies will adjust, trade will move to where there is a comparative advantage and the total pie — the total product in the world — will expand,” he says.

“There are two questions here, and they are empirical, not theoretical questions — one is whether the U.S. and the western countries will continue to have clear comparative advantages in this arrangement,” says Cappelli. “The model before was that India had cheap labor, the U.S. had high skills, [and that] work will move in that direction (toward India). But if India gets cheap, high skills, it’s not clear what the U.S. comparative advantage remains to be.”

Cappelli says that brings to the forefront more questions about the distribution of the global pie. “The pie may get bigger, but who gets which share is never clear from the trade hypothesis alone,” he says. There is also cost of adjustment to deal with, Cappelli continues. “The theory doesn’t talk much about those, but the question is how big the adjustment costs will be, and how concentrated they will be.”

Another imponderable, according to Cappelli, is that the changes in costs “are happening so quickly that it is difficult for people to adjust their careers” to make the emerging new patterns work. “A generation ago, you knew that people were working making shoes — that was not a career you wanted to go into because you could see all the jobs going overseas,” he says. “Now you are trying to guess about what career to go into. You can’t even tell five years ahead where the jobs are gong to be. So it makes the adjustment costs much bigger. Those are the empirical questions, not theoretical questions that are up in the air.”

Limits of Worker Retraining

Large-scale worker retraining to help retain jobs in the U.S. could be one of the first responses of policy makers, but Cappelli doesn’t see many gains on that front. “Retraining has not worked very well,” he says. “The reason is the idea of retraining more or less assumes that if you lose your job we can tell you which jobs there will be demand for, and then we can retrain you for those jobs.” He sees a couple of problems here. “Firstly, there are not all that many jobs that are reasonable jobs that you can get simply by going to school. Secondly, not all jobs fit that model, and in fact, maybe most don’t. Even with jobs that do fit the model in which you can expect to be trained and get the job, part of the problem is we don’t know how long those jobs are going to last.”

There lies the rub, says Cappelli. “Trying to predict which jobs will be in demand in the future has proved to be extraordinarily difficult, and frankly, has failed in rather spectacular ways,” he says. “Part of the reason for that is even before the economy was as flexible as it is now, the lag in the system was so long. When you talk to companies, they say there are jobs here, so we start training people for these jobs. It will take two years to set up the training program and two years to get the first graduate out, then another year to do the evaluation. By the time you figure it out the jobs are gone. It takes five years before you can even tell. It just doesn’t work very well.”

Navigating Complexity Arbitrage

Questions abound about job functions that are likely to gravitate to places like India sooner than others. Some insights into this can be had from the concept of a “mechanism for complexity arbitrage” that Aron and colleagues worked on in a recent research project funded by the Mack Center at Wharton. The project involved collecting data covering three years from several companies about various processes and the places where they were performed across the globe. Managers at these companies overseeing those processes where then asked to rate each of them on a complexity scale of one to seven, with seven being the most complex.

The researchers found a striking polarization in the way managers assessed the complexity levels in their processes. Those in the U.S. and the U.K. formed one group, while their counterparts in India, China and Singapore made up the other. “Whenever work involved number crunching, quantitative analysis, mathematical formulation, statistical data analysis and numerical calculations, managers in India, Singapore and China would say this is low complexity work,” says Aron. “They could find the people to do those jobs and deliver quality on scale, month after month, year after year. But wherever work involves persuasion, communication, context-sensitive responses, interpretation, subjective judgment and cultural sensitivity, managers in the U.K and the U.S. will tell you that is low complexity work.”

Are there natural limits to the kind of work that can be offshored? Of course, says Aron, but he adds that Indian service providers will not encounter them “as long as they do not breach the complexity divide.” He says certain job functions are a natural fit for the U.S. and the U.K. and not easily outsourced, because they require customer interactions and persuasion. These are activities that are “embedded in the context of the market and they need context-sensitive communication,” he says. “The Indian market is nowhere as sophisticated as that in the U.S.; it does not have the range of derivatives like in the U.S. market, and futures and options are just beginning to catch on.”

Aron recalls the case of an unnamed bank that breached the so-called “complexity divide” in outsourcing and had to retrace its steps. About three years ago, a large U.S.-based investment bank decided to source support in India for one of its needs, which was support for a financial and technical investment product. “The Indian employees were able to understand the work flow and the data flow, but much of that had context-sensitive information that the Indian employees didn’t understand,” he says. The company had hired about 100 employees to perform that work, but a year later found that their outsourcing simply didn’t work, he says.

The experiment Aron talks about failed even though the company had invested time and resources in hiring people with combined expertise in finance and information technology and training them for their “knowledge management” assignment. “Although it seemed like a match made in heaven, it failed in terms of the skill level required for such high-end work,” says Aron. He says the company had intensively trained its employees for their assignment, brought turnkey systems, network configuration equipment, PCs and servers. “They made a mirror image of Wall Street infrastructure,” says Aron. “But there is no turnkey transfer of culture and context.”

Citigroup executives might do well to keep these ideas in mind as they go about moving thousands of jobs to India.