« Want to know about global sourcing? Then we'll lend you Anand... | Main | The Industry Speaks, Part III: Demand for outsourcing is reaching new heights, but will vendors disappoint? »

Jan 24, 2010

TrackBack

TrackBack URL for this entry:
http://www.typepad.com/services/trackback/6a00d8356fb76c69e201287709079a970c

Listed below are links to weblogs that reference The Industry Speaks, Part II: When the labor arbitrage deals dry-up (and they will), customers will select vendors that can deliver business-value beyond basic low-cost services:

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

This is well dug Phil.

Also, a point to note is regarding vendors who are not capable of investing to get the functional capabilities will not be anyways in a position to bid for certain of the services that are surveyed, but would indeed like to have those in future.

Phil

You are right on all counts as usual. My 2 cents worth on this topic

1. Since its de rigeur to compare the Services outsourcing to the automobile wave from 70's or 80s, its perhaps worthwhile remembering that Toyota has built 10+ plants in the US over the last 30 years and they did close the last fiscal with 20+ Bn in Gross Profit. Effective use of resources available (call it lean or something else) does make a difference. Cheaper locations are not the only influencers.

2. Value delivered is perhaps best measured in terms of additional revenues generated rather than in cost saved. So transformation initiatives which help delighting the end-consumer (customer's customer) are the ones that would make a difference. Those are the ones that would help build the providers become partners & advisors building long term relationships

3. Investments are indeed the key to maintain competitive offerings. But that begs the question as to who has the money to invest. Facts suggest that the India-heritage company have a 20%+ net margin while some of the traditional leading service providers have a less than 10% margin. Most India heritage providers also seem to have significant cash on hand. Having cash on hand or available margins, does not necessarily always translate to making wise investments (Edsel?) but it does make investing easier.

Shyam

Great piece. Funny how people are looking at the growth of outsourcing as "IT industry growth". Yes, it signifies the growth of offshore IT services, but a shrinking of actual IT employment onshore.

Phil,

You have summed up the industry situation beautifully! Many of the vendors will do little to enhance their higher-value expertise while they are performing well with standard services. Simply put, the standard work is more profitable and leverageable. Communicating to Wall St that this situation is temporary is imperative, but, like everything else with Wall St, they only care about the money they are making now, and to hell with the future :)

Brian

Phil,

your point with regarding getting carried away in the outsourcing wave is well taken. I would however like to point out the age old issue that has plagued the American industry (auto in particular) which is to keep the product development costs down when the profit margins are either remaining the same or are going down. Enter the low cost countries with highly educated and trained work force such as India. The accent is more on highly educated than low cost (which is taken as a given). Granted that domain knowledge is still an issue but in terms of tool knowledge(CAD and analysis) which is an essential part of the product development process, countires like India are not laggers. Bottm line - ther is still room for offshoring knowledge based work dispite the drying up of standard offshoring work.
regards,

Bala

Phil,

would like to respond at two levels of dynamics. One at the definition of Core vs. Non Core (implying non core can be outsourced) and second at tactical level of what next after the benefits of Y1 have been accrued.

The definition of the former has evolved considerably since the time outsourcing has come of age (and is still continuing). At the beginnning, it was transactional / data entry processes that were considered as non core and hence were being considered conducive to outsourcing. Today there has been tectonic shift in that thought process, the holy grail of the past is not that holy today, as business leads are challenging the definition of Core.

We dont have to look far for an analogy, let's see the automobile sector, which i beleive has relatively a far higher degree of maturity to the services. There are instances wherein a majority of the components are outsourced (to ancilliary units) with a view of managing logistics and product costs. These ancilliary units act as aggregators and hence can provide cheaper goods at the desired quality, and if the inventory is JIT, it's a bonus.

Keeping the above in perspective, the conventional outsourcing is following suit. There are higher benefits in outsourcing as we move a knotch up in the knowledge economy, say from data entry to formulating a procurement strategy for a category. That's how we need to view the context of outsourcing.

Now for the tactical piece of what next after Y1. I beleive any service provider needs to bring more on the table than just labour arbitrage to survive. It needs to have a sound strategy for technology intervention through pointed solutions in addition to domain expertise.

So while you are in the process of outsourcing, the service provider also needs to understand and jointly define the "what next" in terms of process re-engineering and automation that can be implemented to drive transformation beyond the initial tactical element of labour arbitrage.

To summarise, it's a flat world in terms of knowledge, the question is, to what extent does one have the courage to leverage it by chosing the right partner.

hope the above helps.

regards,

prashant

My views and predictions - Businesses are & were always judged based on ability to go beyond standard services and real business value but willingness to pay for this value is shrinking many fold, hence western countries will continue to find only cost arbitrage deals in current and newer markets for next few years without enhancing their overall business capabilities and hence reducing customer and employee satisfaction. New technology and delivery models which will be based on very enhanced process/business capability with 1/4th cost and 4 times customer and employee satisfaction will emerge and eat into 40% Revenue of current organizations. so my advice to organizations is to spend money on enhancing overall business capabilities rather then only focusing on bottom-line, as 2010 to 2011 is critical juncture for companies to be good to great or get wiped out by 2015.

Ashok

Phil,
Smart vendors as you suggest are investing heavily in building domain knowledge and functional expertise. By doing so they start to differentiate themselves from common stock outsourcing vendors.
Also they are focusing more on building long term strategic partnership with their clients, strengthening areas where clients need more assistance.
With partnership mode vendors are effectively moving up the value chain by contributing towards client objectives and providing them edge by leverage their competency centers and niche skills. This approach keeps the customers satisfied and also provide ample growth path for the outsourcing vendors.

Read how vendors are differentiating themselves in blog below (Commitments beyond Service Levels)
http://blog.sourcinggurus.com/blogsourcingguru/post/Commitments-beyond-Service-Levels-for-successful-IT-outsourcing.aspx

The comments to this entry are closed.

Your email address:


Powered by FeedBlitz

Follow me on Twitter

    follow me on Twitter

    Translator

    My Photo