Is Outsourcing Dying Or Thriving? (Part 1)

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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