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.