Consider the Source

Frankensourcing

Some not-so-fond childhood memories motivate this week’s guest blogger, Shawn McCray. Shawn is a partner and leader in TPI’s service management and governance advisory practice.

Halloween is just around the corner here in the States, and that reminds me of how much the Frankenstein monster used to scare me when I was a kid. Something about disinterred body parts.

I’m a big boy now, but I’m still frightened by a beast built from a hodgepodge of parts. I call it “Frankenstein Sourcing.” I see it all too often:  Companies using a little bit of that sourcing solution, a bit of another, and so on. What’s missing is a real strategy that runs through and pulls together all the activities. Not only do I see this across companies, but it also occurs within business units.

Why so terrifying? The same adjectives one might apply to the Frankenstein monster’s movements are apt words to describe such sourcing, like: herky-jerky, uncoordinated and mismatched. This is the kind of sourcing that leaves a lot of money on the table, and it’s a recurring feature, with 40% of companies in TPI’s governance benchmark failing to have a corporate-wide body to guide and coordinate outsourced activities.

Given the scope, scale, overall spend, and similarities in pursuing and managing sourcing solutions through all parts of your business, our advice to clients is simple: Get coordinated.  It doesn’t require massive overhead or cost. It’s mainly about communication and teamwork. Better to tackle your sourcing issues now than to wait for when the bosses or stakeholders come for you with lit torches.

The Americas’ Low Point?

It’s been a wild year for outsourcing. The pace of commercial contracts is stronger than ever in Europe and Asia.  Indeed, for the first time ever, Europe saw more outsourcing contracts awarded than the rest of the world combined.
The offsetting news is a dramatic decline in the rate of outsourcing contracts awarded in the Americas, as measured by total contract value, or TCV. Look at the trend line:

Our research spotted contracts that have shorter terms and are more narrowly focused, two factors that explain the regional differences. The average outsourcing contract award in the Americas during the quarter carried a value of just under $155M, 38% less than the average value for the same period in 2006. In contrast, contract values are climbing in Europe and Asia, as are the average duration of engagements.

What’s going on?

Discussions with the buyers of outsourcing confirm that they are tending to contract for effort – headcount and hourly wages – rather than outcomes in some infrastructure services, especially application development and business processes. This trend is apparent more in the Americas than in other regions. Clients are more often opting to award contracts for access to labor at favorable pricing, rather than go through the effort to contract for defined services. The data bear this out.

At the same time that total contract values awarded in the Americas dropped by almost 54% from where the industry stood one year ago, the major India-based providers have seen their Americas-based revenues grow by 37% on a year-over-year basis.

That stat speaks volumes: The India providers are doing well in the Americas at a time when the region is not performing as strongly as the rest of the world. The reason why is that major India-based providers are using a “penetrate and radiate” strategy very effectively: Start small with individual clients and grow the business reach over time.

From a client perspective, the ease of contracting and the appeal of low cost labor are just too strong to ignore. I should also point out that while we typically talk about this model from the perspective of India-based service providers, multinational firms have made significant investments that allow them to compete head to head in the offshore marketplace.

This film is far from over, however: We see a stronger fourth quarter and a decent pipeline of new outsourcing demand going into the New Year. Europe likely will remain the strongest market, but the demand in the Americas looks to be improving.

 

Turning the Worm

By all measures, the pace of new outsourcing contract awards has slowed in 2007. The third quarter reports are out any day now.

The paradox here is the continued strength in the flow of work to India-led providers. You can see that from the providers’ earnings reports. My firm thinks clients are opting for effort-based contracts – paying per worker per hour -- rather than traditional outsourcing relationships that specify the scope and quality of services.

Watch the news in the coming weeks, and I’ll bet you start to see a renewed emphasis on productivity-based and outcome-oriented contracting.  The provider community has the expertise and the tools to deliver great value to clients through real outsourcing, but they must surrender the old ways of selling effort. They have to paint houses like pros.

That said, potential purchasers of sourcing will likely be cynical about such quick cycles in business models. Just as they were getting comfortable contracting for people in low-cost destinations, the business model will change to reflect the rising tide of labor costs influenced by currency exchange rates, taxation policies and rising wages. The prospect of higher labor costs for effort-based contracting won’t be very appealing.

I expect outsourcing demand to suffer from these shifts for a while, at least until we converge on a sustainable business model that blends cost, capacity, and capability. That’s the model that will create long-term value.

 

Crowdsourcing

Mix equal parts outsourcing, Web and open innovation, garnish with “The Wisdom of Crowds” and you get “Crowdsourcing.” Just don’t expect to see it in the upper echelons of Corporate America just yet.

Author Jeff Howe (http://www.wired.com/wired/archive/14.06/crowds.html) characterizes this phenom as distributed labor networks using the Internet to exploit the spare processing power of millions of human brains, much the same way that dispersed computing projects harness the processing might of millions of chips.

MySpace, eBay, Wikipedia, and the vast universe of Linux developers further illustrate the power of crowds properly organized. Howe’s article makes the point that these Web initiatives – previously taboo with old-line businesses – now realize that technological advances are allowing them to source to anyone connected to the proverbial network.

At the same time, such advances are dissolving the cost barriers that once separated amateurs from professionals. Now all the diverse folks who make up the crowd can connect with companies in everything from pharmaceuticals to television. Hobbyists, part-timers, and dabblers have a new source of income, and businesses have a new, cheaper, and often more inventive source of solutions.

I get asked whether this Web 2.0 model is taking root at larger companies with serious business processes. Answer: Not yet, anyway.

“The Wisdom of Crowds,” a deservedly popular collection of work by New Yorker writer James Surowiecki explains that for the crowd to be wise, four conditions must exist: diversity of opinion, independence of members from one another, a specific kind of decentralization, and a good method for aggregating opinions.

Similarly, Howe highlights what he sees as the “Five Rules of the New Labor Pool”: The crowd is dispersed. It has a short attention span. It is full of specialists. The crowd produces mostly crap – but also finds the best stuff.

I believe most serious corporate executives aren’t yet ready to let the crowd sort the good from the crap. But I still think it’s worth watching the crowd.