Another vote for ditching the “O” word

Our super-charged discussion on using more relevant terminology to describe global services delivery took on another twist yesterday, when the WSJ published yet another piece about how the outsourcing market is "taking a hit", citing TPI’s large-deal data for 3Q08. This follows on from another recent article from the same journalist, who appears determined to announce the demise of "outsourcing" to the world.

My colleague Dana Stiffler lends her weight to the argument:

"The number of $25M+ deals signed

in that quarter was the lowest in six years, a disturbing factoid indeed. If you stick to the old-school definitions of outsourcing, it’s easy to understand why headlines like these are so prevalent these days. They’re alarming, and we’re drawn to them. But the demise of large, traditional outsourcing contracts is a trend that’s been underway for years. Stories like the Journal’s – and broad-brush analyst research on outsourcing for that matter -- makes coverage of these markets suspect, in good times and in bad. Are we all even talking about the same thing?

"Well, no. The headline refers to a contract size and type that is in decline. And other points in the piece were spot-on: less project spending, more delays in big-ticket decisions. But the article does not mention that this has been counterbalanced by sustained interest in expanding IT support relationships. Broader resource pressures, particularly around ERP, continue to force spending in the mid-market. I guess there’s not much of a headline in the fact that the third-party business and IT services market continues to grow, albeit more slowly, or that global delivery of services is now a structural requirement in companies’ global operations, and that there’s no escaping it. Problem is, none of this fits tidily under a traditional “outsourcing” heading. It’s time for the “O” word to go."

Well said Dana.  The "O" terminology is clearly misunderstood in many circles.  As Dana points out, "global delivery of services is now a structural requirement".  The politically-charged issues surrounding the offshoring of US-jobs is clouding the real issue regarding what businesses need to do to be effective competitively on a global level.  Businesses need to take advantage of global talent and resources to be competitive, and should not be penalized in this vein.  The challenge for the incoming Obama administration is to create incentives for US businesses to deploy US staff, and not penalize a global services strategy.  That means the US needs to be more competitive within a global context - something Detroit's automakers might need to focus on if they want to find a way out of their current predicament.

Update:  Peter Allen clarifies TPI data:

Dana and Phil ... seeing as how that article formed a conclusion based on data published almost three months ago, and covering one Quarter in the year, one might have hoped for a bit more journalistic thoroughness.

Yes, Q3's contract awards were the softest in quite some time. Dramatically soft.

But, Q4 picked up quite nicely. Like most Q4's tend to do. In fact, while the numbers aren't completely tallied, I am estimating that 2008's full-year record of TCV awarded will surpass that of 2007. (To wit: while Q3 yielded only around $14B in TCV, the month of October alone surpassed $15B!)

Many of us have tried for some time to differentiate between "true outsourcing" (mine: defined services, delivered at defined prices, at defined levels of service quality) and "effort-based contracting" or similar forms of wage-arbitrage staff augmentation. Alas, the broader market is still confused between these two.

I think that 2009 will see continued expansion in the use of "true outsourcing" while the appetite for arbitrage-driven staffing models will suffer. This latter slice of the market is what gave rise to much of the India-based provider community.

Some will have the wherewithal to taste the lemonade, while many others might just find themselves sucking on the lemons of a rapidly changing market.

Bring on 2009!

Peter

Comments

[Shekar Panchapakesan]

I agree with the need for the distinction between 'true outsourcing' and 'effort-based contracting' outlined in the reply here.

I am a new reader of this blog, and would like the opinion of the experts here - conventional wisdom would suggest that 'labor arbitrage'-based outsourcing (or offshoring, or global delivery...) should increase during periods of economic stress and low growth, so companies should attempt to replace higher-cost labor in the US with lower-cost labor offshore as part of a cost-cutting exercise. However, in my personal experience working with offshore programs of significant sizes, I think the periods of greatest growth in offshoring has been during periods when ‘on-shore’ headcount has also grown – e,g, mid-90s and mid-00s. Companies may be readier to increase their offshore usage when they don’t have to ‘replace’ a US worker with a foreign worker, but only augment their resources at a lower rate offshore when they are growing.

I would love to see some empirical evidence that either proves or disproves this observation.

Thanks – and a Happy 2009 to all!

[Peter Allen]

Dana and Phil ... seeing as how that article formed a conclusion based on data published almost three months ago, and covering one Quarter in the year, one might have hoped for a bit more journalistic thoroughness.

Yes, Q3's contract awards were the softest in quite some time. Dramatically soft.

But, Q4 picked up quite nicely. Like most Q4's tend to do. In fact, while the numbers aren't completely tallied, I am estimating that 2008's full-year record of TCV awarded will surpass that of 2007. (To wit: while Q3 yielded only around $14B in TCV, the month of October alone surpassed $15B!)

Many of us have tried for some time to differentiate between "true outsourcing" (mine: defined services, delivered at defined prices, at defined levels of service quality) and "effort-based contracting" or similar forms of wage-arbitrage staff augmentation. Alas, the broader market is still confused between these two.

I think that 2009 will see continued expansion in the use of "true outsourcing" while the appetite for arbitrage-driven staffing models will suffer. This latter slice of the market is what gave rise to much of the India-based provider community.

Some will have the wherewithal to taste the lemonade, while many others might just find themselves sucking on the lemons of a rapidly changing market.

Bring on 2009!

Peter

[Stephen Cohen]

Dana and Phil:

Kudos to you both for raising this issue. I also saw these articles and was concerned by their failure to capture the real picture of global services. The broader community needs to have a different image - and comprehension - of what "outsourcing" really is in today's global environment.

Happy New Year,

Stephen Cohen