Consider the Source

The Year Ahead

It’s the time of year when most of us pause to reflect on happenings of the recent past, with an eye towards the twelve months ahead. I don’t know whether or not it’s a virtue to focus on annual cycles of things, but it certainly is human nature.

We’ve been asked recently by clients, service providers, media and equity analysts to offer our forecast for the global outsourcing industry. Now, I’m no economist and certainly would never claim to be a fortune-teller, but the question certainly merits an opinion.

Based on what we’re seeing in the marketplace – from dialogue with senior corporate executives and discussions with lawyers and services providers in the industry – there are four primary moving pieces worthy of watching.

Offshoring: Labor Arbitrage Replaced by Value. So much of the outsourcing in India and other “offshore” locations is based on labor arbitrage. We see signs that enterprises are poised to focus on the value achieved through productivity in 2007. This theme isn’t new, but seeing it in practice will be notable. The wage-versus-productivity battle frames the setting for multi-national providers such as IBM and Accenture to take on the fast-growing India-based providers such as Wipro, Infosys, TCS and Genpact. We’ll see more head-to-head competition among these players in 2007.

Multi-Sourcing Models on the Rise: Corporate sourcing strategies will blend insourced and outsourced providers. Variants will exist across functions and geographies. We’ll see contract awards to multiple providers, with ultimate responsibility for integrating the services resting with empowered “centers for sourcing excellence” within the enterprise. Look for greater distinction among the corporate executive ranks of individuals who are chartered to set sourcing directions and unify the various delivery resources. For many, this is the re-emergence of corporate shared services.

Brazil, China, Eastern Europe, Mexico, Malaysia, and Philippines will Compete for Market Share with India: We believe that India will continue to lead in providing skilled labor for the accelerating global outsourcing industry, but other locations will participate in the global rising tide. While wages will rise across the board, productivity will come to the fore as the competitive differentiator. The wage differences will be minor, with corporate strategies for business resiliency, time zone proximity, language skills, and management of concentration risk providing opportunities for other geographies. China, with the greatest raw potential, will make significant movements in the acceleration of the English language acumen of its emerging workforce.

Service Providers will likely Consolidate into Two Predominant Groupings: The value proposition through outsourcing is polarizing around lowest-cost “transaction processors” and change-driven “business transformation practitioners.” The gravitational force is around the degree to which outsourced solutions are commodity in nature versus those that deliver value through customized productivity. Additionally, many service providers will adopt greater vertical industry orientation. Contract terms will evolve to reflect the multi-year sourcing strategies of enterprise buyers. And, we’ll see the introduction of real and meaningful gainsharing terms in 2007. Good news for the industry.

All in all, 2007 looks to be an exciting year for the global outsourcing industry – with opportunities for meaningful value to be created for both clients and service providers. As for mergers? If only I knew! One thing is for certain: if you run the leading service providers through the filter of these four moving pieces, there’s opportunity for compounding through consolidation.

Remember Ireland

About six years ago, I was the CEO of a company that provided offshore application-related services from a great location - Galway, Ireland. The folks at the Industrial Development Agency for Ireland were of tremendous help in negotiating an attractive program for tax-favorable operations.

We had a great team of bright, young software engineers. And, our clients - mostly from large, American companies - absolutely loved the opportunity to visit Ireland to review their projects.



Two problems emerged. First, many of the larger technology companies in the software and telecommunications sectors really moved into Ireland with force - essentially creating wage escalation as they competed for a relatively small population of engineers.

Second, India arrived with demographics that dwarfed Ireland in short order. The accents are different, but the language was the same. India just has the sheer mass required to serve the appetite of a world looking for abundant skills.

The golf courses were nicer in Ireland, however.

Rural Sourcing?

A colleague pointed out to me a news item regarding a venture by Accenture and a rural Native American tribe in Oregon that is intended to set up a low-cost domestic service center for outsourced document processing, software development and call center operations.

This reminded me of several conversations with frustrated CIOs of large corporations that were anguishing over the need to rely on offshore service centers in order to achieve cost reductions. The CIO of one of the largest U.S.-based airlines was particularly anguished over this. "When," she asked, "will we put our own underutilized human resources to work?"

Well, it seems that wish is becoming a reality - at least on a small scale. Several companies have recently sprung up in rural areas of the U.S. offering a variety of onshore outsourcing services. One, Rural Sourcing, Incorporated of Jonesboro, Arkansas, enables CIOs to outsource IT work to currently underutilized and often underemployed, lower-cost IT workers living in outlying areas of the United States.

Personally, I don't see much chance of this becoming a major part of corporate sourcing strategies. The reason is scale. Pockets of rural capability just can not offer the ability to scale to the degree that is possible through major "remote" destinations. Further, there would need to be some significant tax benefits made possible to offset the tax and wage differences of India, China, and Eastern Europe.

At the end of the day, though, it's a matter of perspective. If all we do is look at "rural sourcing" as a last resort for those underemployed, where offshore destination countries view the work as a way up the economic development ladder. . . the attitude of the operation will have a very different tone. And, tone means service quality.

Do you think this alternative to going offshore has legs?