Consider the Source

Demagoguery or Demographics?

We're in the homestretch of the U.S. Presidential election -- only another 19 months or so of fractious finger-pointing and speechifying.  Expect to hear an earful on outsourcing -- aka, offshoring -- from both sides of the fence.

On one side will be those who point out that the workforces of the West are diminishing rapidly, making outsourcing to the East a necessity. These advocates will also note that we can be reasonably certain of security measures in relationships among outsourcing participants in a truly global economy.

Conversely, we’ll hear from the other side about job losses at home, as well as the exploitation of other countries. 

Both arguments have merit. But only one has the numbers on its side: Falling birth rates in the industrialized world over the last 40 years -- a trend we can't change overnight even if we wanted to -- has resulted in fewer young people being ready to enter the workforce in these markets. Fact is, the center of gravity for the world's global labor markets really is moving east!

In the U.S., fewer than 30% of people in their 20s earn a college degree. The Employment Policy Foundation projects a shortage of over six million college degree holders by 2012. Indeed, two-thirds of new jobs being created in the U.S. call for college degrees, and another 25% call for extensive technical training. It's that simple: Supply and demand are out of alignment, which is why so many employers are turning abroad.

These realities and forecasts are front of mind for senior leaders of the global companies that sell us our diapers, laundry detergent and cars -- particularly since developing-country markets are also where these companies will see their biggest business growth in percentage terms in the years ahead.

So how do these companies put themselves in a good position to sell more products to emerging consumers? One way is by making sure consumers in those countries -- Brazil, China and India, for example -- are all participating in the benefits of a growing economy. And job growth is fundamental to economic growth.

Put another way: Outsourcing is a rising tide that can lift all ships.

That fact may get lost in the months of campaigning ahead, but it's a fact nonetheless. We need to position our economies for the future, not return to the protective behavior of the past.

A Private Affair

Much has been written and said about the potential benefits to a company that chooses to exit the spotlight of the public markets and go private. But what about that company's clients?

It's a particularly important question for the customers of publicly traded service providers. And the happy answer is: Customers can win, too, provided management of the going-private company takes the opportunity (afforded to it by the deal) to further focus its business.

One of the biggest "wins" for the newly private service provider is a redirection of the financial mindset: Instead of chasing top-line growth by selling more services to clients -- who may be looking to cut costs -- the provider can instead look to build the bottom line by truly matching its offerings to its clients’ needs. Bingo: Both the service provider and its clients benefit.

At my company, we think that a focus on profitability over revenue growth is just one of the gains to be made in a going-private deal now being considered by a major global service provider.

Of course, there are risks to the clients of outsourcing providers, too, in these cases. One is that the service provider, perhaps with the urging of the private-equity backer, will look to transition its clients to common delivery systems rather than continuing to offer custom solutions that truly tackle the clients' needs.

But it doesn't have to be that way, and our experience is that private-equity firms understand the best practices of sourcing solutions.

Clients can and should do their part by rigorously examining their sourcing relations in light of any change in ownership status at their sourcing provider. Here's where a good consultant can help. At TPI, our "punch list" for such a transaction would encourage the clients of a service provider going private to do the following:
       • Review change-of-control provisions in the contract to determine whether they may affect your relationship.
       • Engage the service provider to set expectations on service continuity and improvement going forward.
       • Protect your rights to review and change key delivery personnel working on your account.
       • Demand ongoing attention. Require that service providers' senior managers undertake more frequent governance check-ins with the client.

Soylent Outsourcing

Remember the 70s sci-fi flick "Soylent Green"? That's the one where Charlton Heston discovers the secret behind the movie's title and shouts the film's famous line: "It's people!"

Well, some of what I'm seeing out there suggests that the industry needs to rediscover the "secret" behind outsourcing if we want to keep improving clients' businesses: It's people!

In days past, two of the main motives for hiring a company like mine to help plot a sourcing strategy were 1) to avoid “The Big Mistake” -- the hidden “gotcha" that can blow up a sourcing deal -- and 2) to deal with the various human factors outsourcing raises.

Those were the early days of outsourcing, when clients were looking to get employees -- AKA “in-scope personnel” -- off their payrolls and onto the balance sheets of service providers. Clients had many sincere concerns related to the complex job of transitioning “human assets” to a service provider. Besides attrition, these included knowledge transfer, business continuity and, of course, human-resources considerations.

But with the rapid adoption of offshore delivery models, we’re seeing less “human capital” -- by which I mean smarts and institutional knowledge -- transfer from client to service provider. This could be one of those “Big Mistakes” waiting to happen. By rushing to achieve cost savings and focusing on the benefits of labor arbitrage, our industry might be short-circuiting its long-term ability to achieve sustained productivity improvements for clients.

Don’t get me wrong: This isn’t a slam on the offshoring abilities of some very capable providers that are much in evidence today. Rather, it’s a call to action that we need to remember the human dimension of “services” and be sure we’re addressing them with the same strategic emphasis -- and eye on the future -- we bring to other aspects of sourcing.

Delivery models have evolved, but services are not a black box. And I don’t think they ever will be. There are so many intangibles between the design of a sourcing model and what it produces that we will always need to bring strategic considerations to the table. If we don't, I predict we'll soon be reading about more offshore deals failing because the transition process from client to provider did not include the wisdom and experience of personnel. 

Let's not depersonalize our business the way they depersonalized the food chain in "Soylent Green."