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Is Outsourcing Dying Or Thriving? (Part 1)

Posted on Sunday, Mar 7th 2010

By guest author Tony Scott

Almost exactly two years ago, Sramana Mitra wrote an article titled “The Death of Indian Outsourcing.” That article created quite a bit of controversy and stimulated a lot of conversation. Companies providing outsourcing services, companies using outsourcing services, and people in general in the United States and India often had a reflexive and somewhat knee-jerk reaction to her article (or at least its title) based on their personal biases for or against the entire concept of outsourcing.

Ms. Mitra’s basic premise was that increasing labor rates in India would drive the pure labor arbitrage play for outsourcing services away from India to other locations – a trend that some have called “smart-sourcing” or “world-sourcing.” In addition, she predicted that increasing sophistication in technology – delivered through Software as a Service (SaaS) in “the cloud” – would take away some of the tasks that were currently being done by humans, making some pure labor-based outsourcing much less attractive.

Ms. Mitra challenged Indian outsourcing companies to move up the value chain towards higher value services and to learn how to innovate and “think for themselves” rather than letting their customers do the thinking for them. Just last week, in an overview of the outsourcing industry, she again noted that Indian outsourcing companies must become more global in their sales and delivery of services if they want to survive and thrive.

Of the original article, some industry analysts essentially said (relatively politely) that she was crazy. “Look at the growth of the outsourcing industry,” they said. Many felt there were no impediments to the continued growth of Indian outsourcing – at least for the foreseeable future. Pro-India boosters said that there were plenty of people in India to sustain the growth of outsourced services.

On the other side, those who opposed outsourcing and off-shoring on political or moral grounds were happy to jump onto the headline of Ms. Mitra’s article as a way to say “I told you so.” They hoped the article would prove that the trend towards outsourcing was about to hit an insurmountable brick wall.

Most of the responses were simplistic – often focusing only on the headline and usually considering only one or two factors in their analysis of outsourcing and off-shoring. The reality is that there are a number of key fundamentals that are driving the trend towards outsourcing, and these fundamentals mean the trend towards outsourcing and off-shoring cannot be stopped, whether or not one likes it. These fundamentals include:

  • The value of specialization versus generalization
  • The value of comparative advantage
  • The value of a cluster effect
  • The value of a “flat world” with inexpensive and effective communications for service delivery
  • The increasing globalization of companies
  • The move to Software as a Service
  • The move to cloud computing
  • The drive to integrate IT processes with business processes
  • The global “War for Talent”
  • Labor rate inflexibility in countries with more developed economies

In many ways, the entire outsourcing industry is at the bleeding edge of the global transformation of our economies. Outsourcing companies have very limited investments in “plant and equipment” compared to traditional manufacturing companies (think multi-billion-dollar automobile plants or semiconductor fabs). Their most precious assets are their people – assets who walk out the door every day and who have no automatic loyalty to the company. What they work on is purely in the digital domain, which means their customers can change relatively easily to another service provider. It is hard to create the kind of system lock-in in a digital domain that happens with component suppliers to a manufacturing company, for example. This is business being built, conducted, and managed at “Internet speed.”

This is a fascinating and unprecedented change in the global economy: from physical products to digital content and intellectual capital; from vertical integration to specialization; and from geographic centricity driven by the costs of communications and transport to a globally dispersed environment on both the supply and demand sides of the equation.

Instead of being simply another pundit on outsourcing, I wanted to find out what the leaders of outsourcing companies thought about their industry and its challenges. Over the past few months I have interviewed the CEOs and business leaders of a number of outsourcing companies that provide services to client companies around the world. These companies provide their services from centers in India, China, the Philippines, Eastern Europe, Latin America, and the United States.

In this ongoing series of articles, I’d like to share with you the results of those interviews. You will hear from these industry leaders how they view the world of outsourcing and how they perceive it to have changed over the years. They will also describe what they have done to date and what they plan to do in the future to meet the challenges of the fundamentals I have outlined above, so their companies will survive and thrive rather than die.

Through this series of articles, I hope to provide some insight into what I believe will be the key challenges the outsourcing industry must address over the next few years. What I won’t be doing is taking a personal, political, or moral stance on whether outsourcing and off-shoring are “good” or “bad.” The economic trends that are driving the move toward outsourcing and off-shoring can not be stopped unless we are willing to block off completely the shores of the United States to the trade of both physical and digital goods and services. But even if we wanted to do so, we couldn’t, because even a country that is as geographically and economically diverse as the United States cannot have an isolated economy in today’s world.

Outsourcing and off-shoring are here to stay. We can only hope to learn from as much as possible about this reality so that we can all understand how best to benefit from these trends on a personal, company, country, and global level.

This segment is part 1 in the series : Is Outsourcing Dying Or Thriving?
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Hi there,

I believe outsourcing will be of good cause the more it’s handled accordingly with regards to sending and receiving great service for both employer and virtual staff. Additionally, outsourcing would always depend on the search for service providers and efficient agreement on project management, payment and of course meeting the deadlines.

I highly recommend that companies and entrepreneurs would continue to express good communication and relationships to build better reputation to outsourcing.

Thanks for your post!

Tyrone Monday, March 8, 2010 at 12:44 AM PT

I work for an electronics contract manufacturer. Many of our clients have moved their manufacturing to different countries where the labor rates are lower. This has caused us to expand our customer base in order to remain stable. Our president would love to speak to you more in depth about this topic. Please contact me if you are interested.

Karla Tuesday, March 30, 2010 at 8:02 AM PT

Karla, Please ask you president to comment here for the moment. This discussion needs to happen here, in public.

Sramana Mitra Tuesday, March 30, 2010 at 8:33 AM PT

Christopher, How big is your company in revenue terms?

Sramana Mitra Tuesday, March 30, 2010 at 12:06 PM PT

Studying how the world of commerce is evolving is a fascinating and complex science which is why questions of this sort lend themselves to great debates. My personal opinion is that the majority of the reasons outsourcing will continue are captured above. The additional point to be made is that outsourcing will become more than a cost managemnet or even time management solutions but a new reality for employee and employer relations. At the end of this evolution may well be a global economy of virtual businesses comprises of contracted labor brought in to do one particular project and when completed, that skill goes back into the labor pool to pick the next great project. Companies get the best labor available for the project rather than training someone internally or being limited to the existing roster and people get to do more of what they are good at and add real value without necessarily suffering the pitfalls of corporate politics to climb a ladder. As people gain experience their projects will be meatier and pay higher. So yes, I think outsourcing will continue domestically and globally, enabled by the ability to communicate in real time around the world and have open competitive markets.

Margaret Reynolds Tuesday, March 30, 2010 at 2:37 PM PT

We have not seen the last of outsourcing, especially during times of economic hardships. Companies can use outsourcing to help their already overworked internal IT staff without incurring major deficits to their bottom line. In fact, we anticipate a greater need for outsourcing in a few specific areas, especially energy, investment banking and social media. Solutions will need to be created quickly and efficiently in all of these areas. Eastern Europe is sure to remain a premium location of outsourcing vendors for European clients, mostly due to the strong engineering talent available there. Although budgets may have tightened recently, there is still a strong need for project-based outsourcing and strategic completion of projects.

Julia Simonova Tuesday, March 30, 2010 at 4:48 PM PT

In 2004, CoreNet Global research predicted the predominance of what we called “the globally networked enterprise.” CoreNet Global represents major corporate tenants and owners whose real estate and location decisions move markets. We’re the world’s largest professional association for corporate real estate executives. These people manage trillions of dollars in real estate assets for the Global 2000. As part of our forecast, we said that an “outsourced global service delivery model” would become a major driver of corporate real estate, which is itself an enabler of globalization. Our research over the past year-and-a-half shows not only has outsourcing taken root as a key industry driver, its level of adoption is rising even higher today mainly due to the cost management pressure of this economy. Outsourcing has also changed suppliers or vendors into strategic partners with their corporate clients, whether it’s real estate related or something else. So it’s thriving, probably more than ever.

Richard Kadzis Wednesday, March 31, 2010 at 8:22 AM PT

As many have stated in other articles, outsourcing is here to stay and actually the breadth of what is being outsourced is growing. Outsourcing and Off-shoring will remain a viable means for companies to control costs (employee and real estate) and collapse delivery schedules. Companies are shifting from just outsourcing their IT and engineering services to seeking virtual assistance/outsourcing in other areas such as executive support, accounting and finance, and even business development. There are a growing number of virtual assistance companies, as well as sole VA practitioners that can provide businesses with the support they need as they need it.

Patrick Morris Wednesday, March 31, 2010 at 11:55 AM PT

Outsourcing and the movement of work to the correct cost and service level will continue. There will always be moments of hesitation due to various global factors. The macro drivers will be a combination of country birth rates, GDP and education systems. The three countries with the best combination of these factors are India, Philippines and the country the best fits the customers specific needs. India and Phillipines have export birth rates that force smart talented people to look outside their borders to find their role in the global talent pool. The Indian economy, while strong, cannot absorb this labor pool expansion. The US talent pool is shrinking and business will continue to be forced to look outside the US to find the cost effective talent needed to support their IT and administrative processes.

Ben Trowbridge Wednesday, March 31, 2010 at 12:51 PM PT

Outsourcing is picking up new life due to Cloud Computing. Cloud Computing is many things to many people, one being that it is another way to say “outsourcing” without the negative connotations of US jobs being lost to international locations. With the continued cost and efficiency pressures that IT shops are under, outsourcing will continue to pick up over the next three years. The hype around Cloud Computing will also increase the pressure that CEOs will place on CIO and IT Leaders to use the cloud and effectively start, or increase, the outsourcing process. Outsourcing will become more selective with IT shops choosing mainstream, less strategic components of their infrastructure or application fabric to be outsourced first. The days of outsourcing everything lock, stock and barrel may be over.

Cloud Computing will also allow shadow IT to start outsourcing and implementing new applications and infrastructures without going through IT. Enterprises should be weary of this as companies must keep track of outsourced components and properly manage them and the vendors that support them. It’s never recommend that IT shops try and shut something down completely, so this means that IT will need to work with the business and create a tracking and vendor management process. All outsourced IT components (application or infrastructure) must be properly managed.

As Cloud Computing and Outsourcing vendors perform massive data center tech refreshes, they will be able to offer an economic advantage to customers that IT enterprises will find hard to pass up. Expect to see the outsourcing trend continue and pick up new life as a result.

Scott Archibald, Managing Director, Bender Consulting

Scott Archibald Wednesday, March 31, 2010 at 2:15 PM PT

We see great advantages for business to consider outsourcing portions of their IT functions. By outsourcing the fundamental IT services, it allows internal IT resources to focus on specific business-directed initiatives that can provide essential services and reduce costs. The Cloud Computing movement is providing the resources to accomplish this. Three things happened last year to push cloud computing to the forefront. First, people became comfortable with high-speed bandwidth connections. Second, the maturity and general acceptance of virtualization technology made it possible for centralized providers to build highly scalable, dense computing capacity at a price point compelling consumers to explore alternative IT solutions. And, lastly, the economy tanked, which caused end users to say, what about that cloud thing? IT needs to be able to work with the business side of the organization to understand what technology can do to drive innovation. IT needs to focus on what they can do to take market share away from competitors. Cloud computing is just one more tool that IT can use to accomplish that job.

Lisa Dreher Wednesday, March 31, 2010 at 3:54 PM PT

Outsourcing is undergoing an evolution. The version of outsourcing that was based purely on cost reduction delivered through labor arbitrage has reached a point of diminishing returns. While it is true that the market is truly global and supply is being delivered through new, lower cost destinations the cost can never reach zero. At some point, the cost savings of moving to a new, low cost destination becomes offset by the risks and costs of moving.

This results in at least two market pressures accelerating evolution. The more adept players in the outsourcing space will seek new and innovative ways to reduce costs. This can be done by rationalizing the IT portfolio, employing cloud or SaaS alternatives, or other non-labor approaches to solving the cost issue.

Another imperative is for the outsourcing providers to focus on the clients’ business issues instead of providing armies of cheap labor. As the economy improves outsourcing companies will have to do more to remain competitive.

The never ending fight to reduce costs by providing cheap labor cannot be sustained indefinitely.

Doug Wednesday, March 31, 2010 at 4:22 PM PT

While the argument can be made as complex and politicized as one would like, one basic business driver of outsourcing remains: Outsourcing allows companies to stay focused on their core competency, while related work–such as product testing–can be strategically delegated.

The decision to off-shore can be a politically sticky one, and at Altus, we look for the best partners regardless of location. Most recently this led us to work with U.S. based Symphony Services to expand our engineering and testing departments. We happen to officially announce our relationship just this week, in an interesting coincidence.

Given the growth and demand we’re seeing for our enterprise video solutions, we looked for and found a proven, reliable development partner; and in the larger scheme of things, it’s going to help us get our products to market faster. Sure, we recognize it doesn’t always make sense to employ, but we see strategic outsourcing as a practice that more and more, enterprises need to seriously consider, lest they risk becoming less competitive. Because of outsourcing, we can flexibly scale our engineering resources. Our position is that when strategically managed, outsourcing can potentially drive a company’s core business farther, faster.

Our partnership news from just yesterday:
Leading Enterprise Video Search Company Turns to Symphony Services to Expand Product Testing and Development Efforts

Ted Cocheu Thursday, April 1, 2010 at 9:39 AM PT