Frost's Conundrum

Almost a year ago we saw the first evidence that the outsourcing industry was changing, as our clients and other organizations seemed to be feeling less positive about the promises of outsourcing.

Sure, the outsourcing business model had proven its value time and again – and continues to do so: By our count, there are over 1,900 active commercial outsourcing agreements of at least $50 million each in place today. These agreements rarely get terminated. They usually get renewed.

But along the way came offshoring – or, to be more precise, the ability to contract for effort rather than outcome. The outsourcing industry was built on the promise of “defined services at defined prices.” That's another way of saying that outsourcing is focused on the quality of results rather than just getting the job done.

As I mentioned in a recent blog, many clients tell us that their managers are really not comfortable operating in an outcome-oriented setting. They’d much prefer to manage a given business process or function in terms of the resources devoted to it. So they opt to offshore rather than outsource.

As indicated in the results of TPI's 2Q Index, with the rising tide of labor-based contracting through offshoring, many organizations have come to the conclusion that the fastest, easiest way to get the promised benefits of outsourcing is in fact to NOT to outsource, but rather just buy people at lower prices through offshoring.

So we've arrived at a crucial inflection point for this industry, just as the poet Frost was confronted by the choice between the two roads. Does a company jump on the lower-cost bandwagon? Or does it demand a more holistic solution through outsourcing, one in which it can seek to control a variety of outcome variables – be they productivity, quality, or whatever? And, might the first route actually be a journey to second?

The service providers almost all show their hands in this game. They need to play in the labor-arbitrage game because it has taken flight so quickly.  But many also are trying to offer transformational services.

Can both strategies survive?  How much time will our industry spend in the realm of cheaper labor?  What are the catalysts that will move the industry and its clients definitively toward progressive and value-creating outsourcing? 

We think the industry must innovate to survive. Now.