This is a strange time to discuss outsourcing. A global recession, a new American president who wants to shore up jobs domestically, and layoffs the world over – does outsourcing even have a future? Yes, it definitely does, but guess what? The future is all about Outsourcing in a new Avatar. The reinvented Outsourcing will give a fair chance to all players in the game, will be more global, and will operate through a more sustainable model than the earlier one. Let’s examine the top trends in this hot new game.
The pace of Globalization will temporarily slow Outsourcing. The keyword here is temporarily. The economic slowdown will force corporations to take some time out to assess their needs, evaluate their options, and do their research. Yet, in the end, outsourcing will be the natural choice, as the fight to stay in business will slowly but surely steer companies towards outsourcing their work. According to the findings of consultancy EquaTerra’s Pulse survey for the third quarter of 2008, 42 per cent of survey respondents indicated that economic conditions are driving more outsourcing, despite slowness in certain market sectors, like financial services.
Says Mr. Stan Lepeak, who is the Managing Director of Global Research for EquaTerra, “There will be a reassessment of current global outsourcing strategies/destinations. As buyer focus shifts to cost reduction and cost avoidance, organizations will carefully analyze current and future outsourcing efforts and service provider partners to ensure they are getting services from the most cost-effective location”.
Political turns of events will never drastically impact Outsourcing. Be it the President of America, or any other head of state, anywhere in the world, outsourcing cannot be driven by a Government’s agenda to such an extent that it drastically affects it as an industry. Outsourcing will instead be driven by factors that drive Globalization - corporations’ needs to turn competitive, achieve economies of scale, cut costs and even eliminate costs. Contrary to popular belief, the recession will actually get more and more countries to turn to Outsourcing, albeit in slow motion, as costs will drive every decision they make. Experts agree that tax-breaks to source work onshore may not outweigh the cost savings that corporations enjoy with sourcing work from offshore providers.
Service providers will and should avoid putting all their eggs in one basket. The recession has taught some hard lessons to those service providers who had all their clients in just one geographic location. The US for instance, accounts for 61% of India’s IT and BPO exports. The trend now will be to also look at the opportunities in European, Australian and Middle Eastern markets including the US markets. India-based HCL has a huge European presence. China-based Neusoft serves customers in the United States, the Middle East, and Southeast Asia. For IT services in Europe, the UK is estimated at a $50 –60 billion market, Germany at $40 - 45 billion and France at $35 - 40 billion. These are clear indications that the world is turning to outsourcing, and service providers can have their pick, instead of concentrating on just one or two of geographical locations.
Near shoring, Global development centers and regional centers will support off shoring efforts. The idea that near shoring will replace off shoring does not hold too much water. However, near shoring cannot be wholly discounted. US companies will look at countries like Mexico and Guatemala for some of their back office work. These countries will support the main off shoring efforts rather than replace them. However, there will be a lot of existing offshore service providers opening shop in near shoring locations to take advantage of the near shoring trend. Major players such as India’s Cognizant Technologies already have a presence in Argentina, Canada and Hungary. Mexico’s Softek is a major player, and is incidentally credited with the introduction of the "Near Shore" (trademarked) service delivery model in 1997.
Service providers will also move closer to their clients. Regional centers will make sense for service providers who have clients in Europe and the Middle East. Such an arrangement will help ease communication and language barriers (by employing local staff), and will also go a long way in building long term, trust-based relationships with clients. HCL’s Europe operations are spread throughout UK, France, Germany, Netherlands, Belgium and Sweden and have grown to acquire more than 70 customers over the last 5 years.
Finally, global development centers will also be the norm. This will help the big fish among outsourcing providers to meet talent demands by reaching out to other outsourcing countries, and using their pools of talent. Companies such as China’s Neusoft, Brazil’s CPM Braxis, Russia’s EPAM and eTelecare Global Solutions, The Philippines will all have global development centers to service their clients. Mexico’s Softek has eight global delivery centers in Mexico, Brazil, Spain, and China.
The new rules of the Outsourcing game. The new wave of outsourcing will play by some surprising new rules:
• There won’t be one preferred outsourcing destination; existing leaders and first movers in the outsourcing provider marketplace will have to strive just as hard as the new players to win outsourcing contracts for basic back office work. However, bigger, more established service providers would stand a better chance of survival during the recession.
The salary inflation in established outsourcing destinations will correct itself out, at least during the course of the recession.
• Soft skills will matter just as much as technical expertise. According to a keen Silicon Valley observer, who prefers not to be named, “Part of the reason that Indian off shoring has lost its appeal for US outsourcers is that there is a great deal of mutual frustration between the Indian and US teams where communication is concerned”. Different cultures, different approaches to tackling work, and simple language problems will make clients more careful when dishing out projects to service providers. Indian companies are realizing this lacuna, and working on employees’ communication skills. The major non-Indian outsourcing providers are also expected to follow suit, and work on employees’ communication skills, as location and technical expertise alone won’t guarantee work.
• This applies to the on-shore teams as well. In A.T. Kearney’s recent Offshore Success Study, survey respondents said internal resistance to change and cross-border cultural and communication issues were their two biggest problems. “Both issues are intrinsically linked, leading to reluctance to collaborate and communicate effectively with the offshore team, and ineffective knowledge transfer. Successfully avoiding these pitfalls require a thoughtful communication and change-management plan”.
• Companies based in Egypt, Tunisia and Lebanon will rank high on European companies’ lists of service providers, primarily because of their multi lingual capabilities. Egypt is gaining fast recognition among European outsourcers and is even the recipient of the prize for best outsourcing destination at the British National Outsourcing Association’s 2008 awards give-away.
• In the first-mover outsourcing destination India, there will be a trend to rise above their current “work-as-per-instructions” delivery model. The new model will tap the innovative and creative abilities of service company employees, so far lying latent and under-used. This will be driven in part by the salary correction that will take place on account of the recession. With a plum job at a service company losing its luster, a percentage of Indians who are looking for higher rewards will now look at product offerings. Innovation and creativity will come to the fore after a decade or so of complacency in the race for the delivery-based outsourcing service contracts. India will finally be ready to go the product way, and if the trend continues, it will eventually also be in the running to outsource its own work, perhaps to other Indian companies.
• Finally, off shoring will move higher up the value chain, but with a twist. Captive centers will be the preferred outsourcing model. Why? With free access to a global pool of talent, outsourcers will scout for providers in the R and D and management areas too. However, companies will source higher end work through their own captive centers located in cheaper countries, rather than trust a third party service provider with their sensitive, confidential data. For the outsourcing provider first-mover country India, basic back office work is getting more expensive. To justify higher salaries, if the country plays its soft skills cards right, it will be the most preferred destination for services higher up in the value chain.
In conclusion, outsourcing is a game that everyone is invited to participate in, even though it looks like India still has the advantage over other nations in every way possible. With economies of scale, cost savings, skill competencies and just plain location being the driving factors, just about anyone can jump in and participate. As Phil Fersht, research director of Global Business Services & Outsourcing at AMR Research aptly puts it, “It's about accepting that we now operate in a global economy and that we are competing at a level where we need to work as hard, and as smart, as the next nation.”
References and Bibiography
http://www.offshoringtimes.com Europe looks good for Outsourcing
www.atkearney.com In Offshoring, Execution is Everything By Marcy Beitle, Arjun Sethi and Adam Dixon November 2008
http://www.outsourcing-offshore.com/bigworld.html It is a Big World -- Offshore Suppliers You May Not Know
By Jimit Arora, Senior Research Analyst, Eric Simonson, Everest Group. May 2008
http://pcworld.about.com/od/softwareservices/Will-the-Recession-End-of-Offs.htm Will the recession end of Offshore Outsourcing? Phil Fersht November 2008
http://www.sramanamitra.com/2007/02/09/need-product-companies-for-indias-growth/ Need product companies for India’s growth Sujai Karampuri February 2007
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