Changing Face of Outsourcing: Dying or Thriving– Getting Past Hype to Uncover the New Reality…

Do what you do best and outsource the rest ~ Tom Peters

Outsourcing is not about cost, it’s never been cheap, and it never will be cheap. “The delusion of outsourcing is that it will somehow save your product money. The truth of outsourcing is to bring a company expertise it doesn’t have, cannot find, or cannot get a hold of.

But, it’s not cheap”, says Alexander Fernandez. Knowing what you’re good at is key: Knowing what you’re not good at is better: Accepting what you’re not good at is supreme. According to Antonio Altamirano, the concept that outsourcing means exchanging an office filled with Americans in the Silicon Valley with an office i n Mumbai filled with Indian workers is outdated. 

There’s really no added-value in simply moving an office to anywhere for that matter. You will face the same geography-centric issues; the lack of top talent and inability to attract out-of-the-box innovative thinkers to your geographically bounded work space…

Forbes recently published statistics about the rapid rise of Indian salaries, which says, by 2015, India’s cost advantage over the U. S. will have disappeared. For India and China, their bread and butter is having the cheapest labor, however, there is the new reality; wages are rising in both countries and quality is stagnant, and there are other cheaper labor pools joining the market to compete as ‘bottom feeders’. According to Raymond Watt; Conventional cost-based thinking regarding outsourcing is dead. The evidence is stacked against outsource frugality”.

BusinessWeek is predicting that outsourcing as we know it may be coming to an end: Well, sort of. The rise of cloud computing will put the traditional outsourcing industry in jeopardy as tech giants like Google and Amazon take market share from smaller businesses in the U.S. and India. According to the ‘XMG Global 2011 Year-end Forecast Report’; traditional outsourcing has reached the limit of the savings it can produce. The global outsource industry, including offshore and onshore, is estimated to reach $464 billion in 2011, a 9.2% increase from 2010’s $425 billion. The year 2010 had stronger growth at 13.9% from 2009’s $374 billion.

The race to be the top offshore destination continued in 2011 between China and India, as these providers seek other markets outside Europe and the U.S.  ‘XMG Global’ estimates the total revenue of the offshore segment will amount to $144.8 billion.  India will capture 42.5% of offshore market to reach $61.5 billion in revenues, while China will continue to lag India with revenues reaching $45.7 billion equivalent to 31.5% of the market.

The Philippines will still hold the third spot with estimated revenue of $10.7 billion capturing 7.4% share. According to XMG Global, chief analyst Lauro Vives, the U.S. economy is still on the road to recovery with a forecasted 2011 GDP growth rate of 2.6%, slowing down from last year’s 2.9%.  China, with a strong East Asian client base like Korea and Japan, is less affected.

China also has a stronger hold in their domestic BPO market and in 2010; more than 75% of service outsourcing revenue is from their domestic market. Indian outsourcers are also starting to realize the importance of the growing their domestic market. The Philippines is likewise taking steps to gain more of the offshoring market share from non-English speaking countries. Vives concludes, “Given the continued growth of competition and increasing demand from other countries besides the U.S. and Europe, expect a sustained displacement and redistribution of market share not only between India and China, but in other emerging outsourcing destinations; such as, Brazil, Mexico and Malaysia.”

In the article The Future of Outsourcing by outsource2india writes: The big question on many people’s mind is: what will the future of the outsourcing industry look like in the next 10 or 20 years? Though India  managed to position itself as major outsourcing hub, questions about its future in outsourcing continue to surface in industry circles. The dynamics of global business are changing, and outsourcing is no different. With the outsourcing industry emerging from the aftermath of the global recession, there are a number of trends that give us a glimpse of the future:

  • Buyers will seek more standardized solutions from their outsourcing engagements, so they will have to differentiate themselves through performance rather than pricing. Hence pricing structures will be stabilized to some extent.
  • Many small alliances, focused on increased operational efficiencies, better quality control and reduced back-office costs, are being set up. This trend is going to continue.
  • Shared and common services were always considered a threat to outsourcing, but the trend is changing. Sharing critical business and IT services has been proven to cut costs, reduce errors and improve productivity.
  • Industry experts predict that Latin America and Europe will be the new outsourcing destinations in the near future.
  • Brazil and Russia will make their presence felt in the global  outsourcing market and China will continue to move ahead.
  • According to industry experts, consumption-based technologies that are delivered through the cloud will grow, as they are cost-effective.
  • Some analysts predict that European carmakers will start outsourcing their business. This would result in cars being developed by other companies while being sold under their brand names.
  • Big pharmaceutical companies will launch new drugs in the market at a fraction of the current cost by partnering with India, China, and Russia in molecular research and clinical testing.

In the article Traditional Offshore Outsourcing on the Skids by Pam Baker writes:  Rocked by smaller margins, stagnant sales, shrinking budgets and staggering staff reductions, enterprises still reach for outsourcing as a coping mechanism but they do so with a jaundiced eye.

Offshoring is still thriving, but you may not hear about it much anymore as many companies want to stay quiet on where their call centers and operations are located for fear of backlash from the U.S., explained Scott Archibald. Rates have increased and there are many issues related to communication barriers and quality of work, relative to the standard of work being performed onshore.

Poor quality and rework has caused the true cost of offshoring to increase.  According to a Gartner report, buyers will remain price-sensitive, particularly for IT services they perceive as basic but, they will look for smaller and shorter-duration contracts. Risk-averse customers will want transparency and predictability from their service providers, which will increasingly guarantee outcomes and price.

Gone is the theory that cheap labor is the alpha and omega in outsourcing models.  “Outsourcing is still alive and well, but it has a new name: cloud computing,” said Archibald.  Many U.S. companies have pulled some portion of their jobs back to the U.S. and complemented that with work being done nearshore. Jobs that once went to India, China and Russia are now being moved to places like Costa Rica and Panama.

This strategy is better received by U.S. customers and removes the time zone differences and communication constraints faced by companies in the U.S. The answer then, as to whether outsourcing is dying is; no, but it is radically changing.  Outsourcing providers, however, will have to seriously up-their-game to survive in this new reality. Reducing costs are table stakes, now. The providers that can also deliver solutions that truly impact and improve their customers’ businesses will be the winners.

In the article “Top Outsourcing Trends to Watch ” by Datamark writes: Emerging technologies continue to change the face of BPO, and the uncertain economy has companies reviewing ‘outsourcing’ options; within the U.S. it’s ‘nearshore’ in Latin American, and ‘farshore’ in India, Philippines, and China.  Top outsourcing
trends:

  • Rise of mobile apps: Expect BPO providers to provide clients with mobile apps for monitoring and auditing outsource processes. Features will incorporate business intelligence, dashboards, analytics and instant messaging with the provider.
  • Social contact center: Outsourced contact centers will have savvy staff keeping customers happy and engaged through Facebook, Google+, Twitter and other social networks. ‘Social Customer Relationship Management’ will include following chatter on social networks.
  • Gamification will liven up the dull side of BPO: Although gamification has emerged in the past year as a hot buzzword, the concept, as applied to business, has been around seemingly, forever.
  • Public-private initiatives worldwide wll stimulate BPO gowth:   Countries will aggressively compete for a slice of the global BPO market, which is expected to grow at an annual rate of 5.4% to $93.4 billion in 2015, according to analyst ‘Ovum’. As India becomes more expensive, look for the Philippines, China, Africa and Latin America for outsourced business processes at the low to mid-point of the value chain.
  • U.S. will take a lesson from international public-private alliances: The U.S. ‘rural-shoring’ (onshore) model; outsourcing processes to communities with low costs of living, will continue to intrigue companies that are not satisfied with their ‘farshore’ experiences.

Nearshoring, offshoring, onshoring, insourcing… very few areas of economic activity have spawned as many confusingly similar buzz words as ‘outsourcing’. What links many of them is the idea that the old-fashioned strategy of sending work somewhere else purely to lower costs or streamline processes is hopelessly outdated.  There has been a shift in terms of what’s being outsourced.

Companies have become more experienced in outsourcing, and they have moved away from relatively simple, low-cost activities to the more complex outsourcing that involves; knowledge creation, improved product quality…  In the past decade, many in the media have declared ‘outsourcing’ itself as an industry, but some think we have moved on from this broken jargon.

According to Irina; the time has come to stop thinking of outsourcing as something good or bad, and to just accept that all companies use outsourcing to some degree. In today’s uncertain business climate, adopting a strategic view of ‘capability sourcing’ isn’t an option: It’s imperative, if your company is to have any hope of leapfrogging the competition.

Outsourcing should no longer be the scourge of the media, and the stealer of jobs. It is merely one more business strategy that allows a company to access resource in a flexible way. The concept of outsourcing is alive and well, and a part of 21st century business. Perhaps the ‘word’ outsourcing is the villain with a bad reputation, and perhaps the ‘word’ outsourcing should just fade away and die.

If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business. ~Lee Kuan Yew