The Industry Speaks, Part I: it's not all about cost anymore, outsourcing provides a powerful change-agent

So it's time to drip-feed the intentions and experiences of 1055 buyers, intermediaries and vendors into the global sourcing industry. 

We'll be discussing the results from our "Seeking the New Normal in Outsourcing Delivery" in full at the Global Services Conference on 28th January, but the nuances behind why - and how - companies are exploring sourcing delivery models, as we come out of a painful recession into an uncertain climate, need to be aired and discussed. 

There's been a lot of talk about a "New Normal", or a "Reset Economy", that things will never be quite the same as before, however, we really need to zone-in on reality to grasp what these new dynamics really entail, in order to understand how we can address them. 

To cut to the chase, most industries are in a state of profound change, where businesses are having to accomplish new levels productivity and sources of revenue simply to survive, let alone grow, in this climate.  Whether you're making cars, pharmaceutical products, providing consulting services, and so forth, the chances are there's someone else in your industry vying to deliver what you do at lower cost, and potentially better quality.  (Unless you're in banking, where it's business as usual...). 

The big difference today is there aren't really any major developments on the near-term horizon to fuel a fresh wave of new economic growth, such as those provided by the Internet, computing and telecoms revolutions of the last 20 years.  This time, the name-of-the-game is to optimize the tools we have, and be smarter than our competitors.  Eventually, we'll see real progress being made in areas such as medical research, Cloud computing and Green tech that should fuel a new growth era, but it's not going to be upon us quite just yet.

In today's global economy, the options available to provide products and services leveraging global talent and new technologies, are almost suffocating for most firms.  There's never been a time more crucial than now to find the right partners who can help you source global talent effectively.

When 209 enterprise buyers of outsourcing services were asked what were the most important reasons  driving them to evaluate outsourcing in 2010, we received the following results across small (under $750m revenues), mid-sized ($750m-$3bn) and large ($3bn+) customers:

Figure 1: Customers are looking to drive change into their operations to become more effective globally

You can clearly see the contrasting motivations here between small, medium and large-scale enterprises when in comes to their motivations behind outsourcing.  Let's drill a bit deeper here...

Cost-reduction dominates, but only where there is significant scale to exploit labor arbitrage opportunities.  While the mid-large customers (90%) overwhelmingly look at cost-reduction as their prime driver, smaller firms do not have the same scale to enjoy such immediate cost take-out potential, with only 60% citing reducing costs as a primary driver.  They actually regard accessing new process acumen, technical skills and having support to operate more effectively at a global level, as similarly powerful motives. 

Empowering global operations and re-engineering processes are coming to the fore.  When we ran a similar study six months' ago, it was already becoming clear that customers, when looking at outsourcing, are anticipating more business benefits than merely driving our some initial cost.  As we emerge from the recession, their desire to leverage global sourcing to help them operate more effectively as a global organization and re-wire their operations to support that process, is becoming even more apparent, with over half of all customers citing the need to globalize and transform processes as prime outsourcing motives.  And this is across all size-classes of customer.  The need to globalize is impacting all companies, and outsourcing is providing one vehicle firms are looking at to help them achieve it. 

The mid-market increasingly views outsourcing as a vehicle to force change into their business operations.  As we've discussed exhaustively during the downturn, many businesses are struggling to break out of the old way of running operations, and outsourcing is increasingly being viewed as a major change-agent, with close to two-thirds of mid-sized customers citing this as a very important driver for outsourcing this year.  While mid-market customers clearly feel the need to combat fatigue from old business support models, large firms are less inclined to view outsourcing this way, as they are more used to using customized sourcing approaches and captive / shared services models, that are harder to "change" solely with outsourcing engagements.  Small firms tend to use outsourcing moreto augment the value it brings from an added resource, talent and global standpoint, but because of the lack of scale will struggle to force real change into the business models with limited labor arbitrage opportunity.

There's much more to follow from this study in the coming days, but we can already conclude that this unique view across the real drivers behind outsourcing clearly compliments the profound and fundamental changes we are going through across most industry sectors.  Global business is rapidly changing, and outsourcing provides a vehicle for many business to change with it.  Love to hear your thoughts / comments.  You can also email me at phil dot fersht at horsesforsources dot com.

Comments

[Andres Chavarria Miranda]

Phil,

As an outsourcing/nearshore provider country in manufacturing, IT, customer support, we get asked this many times.
Cost IS important of course, but it SHOULD not be the only reason to Outsource your non-core business functions.

Besides reducing cost you should also consider:

1. Will outsourcing help me do my core business functions (sales, branding, distribution or whatever they are) better and allow me to focus more time and attention on them?

2. Will outsourcing help me acquire more international experience/markets/better suppliers faster than doing it "in house"? Will it increase my company's competitiveness on sales and profit, and not only in costs?

Andres

[Andre van Berkel]

I agree with Robert Barrimond. Any company that considers outsourcing, should carefully analyze what their core and non-core activities are.

The one big advantage of outsourcing is that your non-core activities become your provider's core activities. Which is why outsourcing should lead to quality and price improvements.

Andre van Berkel

[Robert Barrimond]

Phil: Outsourcing is viable and strategic when the cost of buying a capability is less than developing it in house. But that cost is not in immediate dollars. You have to think about what makes your business successful, it's secret sauce. And if that sauce can be poached, you are in for a world of hurt. Witness the Chinese automakers leveraging know how they gleaned from years with working with American and European manufacturers. Witness the "4th shift" knock offs. Outsourcing can be wonderful, freeing up valuable resources to focus on your success. Just be careful that short term success doesn't turn into long term failure.

Robert

[ODeskBuyer]

Outsourcing is all about cost at the sacrafice of quality, which costs even more in the long run to make up for.

I had an interesting experience with the "programmers" at Odesk. I've written about at my new blog:

http://iansdailythoughts.wordpress.com/

I'm now taking a dim, very cynical view on anyone who claims that outsourcing is a good thing to emerging economies.

[Phil Fersht]

@yadu: agree cost scnearios are essential for many mid-to-large scale organizations, however, many firms simply do not have technical skills to support new ERP rollouts or technical upgrades.

For example, if you swap out, say, QAD for Oracle, how can you retrain all your QAD developpers to program in Oracle and support it? Answer is, you can't - it's either impossible, would take far too long and would cost a fortune to do effectively. Hence, you need to find external support, and an outsourcing transition is the most likely scenario to do it, where you are replacing legacy skills with new skills.

Phil

[yadu tekale]

on this again, i am always bemused when i read comments that outsourcing is not about cost.

outsourcing IS about costs. no organization will engage in outsourcing if there isnt a cost benefit.

the difference in philosophy over the years is that cost in outsourcing has become hygiene.

you go into a restaurant and expect to find clean table linen. you do not go into a restaurant for clean table linen.

[yadu tekale]

outsourcing brings about organization change whether you want it or not.

so if companies are now explicitly citing it as a driver to outsourcing they have merely woken up to smell the coffee.

[Peter Rogers]

Phil,

Flexibility, Time zone management, increased productivity, re centering on value add, increased quality, innovation, reduced head count and overheads, less HR, less office space, de-duplication of positions ac cross organizations AND COST. These are all reasons (there are many more), doing it well to get good value is another question!

Peter Rogers

[Luis A. Viada]

There is no either/or in this equation. To force operational change (outsourcing or otherwise) without a measurable benefit as an outcome just doesn't make sense. Process transformations such as outsourcing carry significant costs in terms of capital and time. Under no circumstances should anyone decide upon outsourcing before undertaking a thorough assessment of the current state of the business process in question. That analysis should clearly define the problems or defects you seek to eliminate and then identify the root cause of the problem. Only at that point do you decide which is the right approach to solving the problem. The fact is, outsourcing is just one of a number of possible solutions to improving process efficiency and margins. The others include consolidation, elimination, automation and standardization. The application of process quality methodologies such as Lean and Six Sigma would produce the kind of evaluation to which I'm referring.

The foundation for those process improvement methodologies is a solid business case that defines the underlying cost of the current state of the process, the implementation costs of the proposed solution and quantifies the benefits of the solution to offset those costs. So, if you execute your analysis correctly and decide that outsourcing is the right solution, by definition the exercise should not only improve your process quality, but also yield quantifiable benefits in terms of reduced costs, improved top line, and/or customer satisfaction.

To launch into an outsourcing solution merely to reduce without the above process management discipline is likely to produce only short-term benefits - i.e. for as long as the cost arbitrage remains. In the meantime, you may have missed the real opportunity for sustained, long-term process efficiency,

Luis Viada

[Roberto Martinez]

Phil,

When I see a company that wants to outsource because their priority is to save, I also see a fail relationship and a fail strategy. Sure, cost savings is the easiest way to justify a relationship with an outsourcing vendor, but it is not the best decision trigger.
Cost savings, not exactly in the dollars you will pay but in what you will get and how that contribute to your company strategy.
Access to talent and diversity is not easy to justify and it is case by case. Either there is a lack of awareness in companies to invest time in this not easy to justify reasons and the outsourcing vendor to propose along these lines.

Sure companies want to save costs, but we have seen that focusing in customer service, improve your offering is more efective. Just look back at companies that were successful last year.

Then, outsourcing YES, because of Cost as the primary reason, NO. That will kill your business delegating to someone else that just want your dollars,

Roberto

[Vamsi Thota]

Phil: Cost, a big Yes. But, I have seen long term contracts and partnering yield improvements and changes in surprising new ways. A vision attached to the whole idea of outsourcing and effective communication of the vision has the potential to spur process innovations, mostly minor ones, but adding up to a big change. The processes are mostly mundane and smart people working on these processes seek challenges in improving these processes. They can be small things like better presentation of reports delivering more insight to the management, just being that much more keen on identifying areas to automate to attarct more work etc.,

Vamsi Thota

[Sachin S Rajshekhar]

Phil,

Having served Outsourcing companies for a long time in my career it’s definitely never been about cost. Back in the 90s the concept itself need to be explained and marketed to Foreign companies. By the beginning of 2000, clients were very clear on their expectations and measurement compliances which meant they knew what they were getting into.

Going forward, in the coming years I see outsourcing companies trying to be more specialized in their services by focusing their client base within specific industries only. This would clearly mean apart from the quality aspect client companies would start receiving focused guidance and opinions from another prospective, which will lead to more innovative products and services in the market.

Bottom-line…..Outsourcing is there to stay and its going to be an integral part for companies formulating global process and standards,

Sachin

[Gary FitzGerald]

Phil,

At the end of the day cost is a factor, however, the prime benefits I have gotten from outsourcing (in my case to India) has been flexibility and the extra skill sets to expand my own reach.

At my fingertips I have very professional people who can have a very unemotional view of whatever project I am working on,

Gary

[Terry Hartmann, CMA, CFM]

Phil -

Some reactions:

1- Matching the Market Size and penetration data to the respondents size stratification should prove interesting, if available. i suspect that the Mid-Size firms ($750M - $3B) form the greatest opportunity segment for potential Outsourcing decision.

2- The first comment referred to the root company's inability to break through the divisional barriers without using Outsourcing. I call this (inappropriately, I'm sure) the "cojones factor". If a company doesn't have the determination to make significant process and operational changes without going to an outsourcer, then they are likely missing other opportunities as well.

3- There will be continuing pressure on off-shoring from the US, especially in today's atmosphere of 10%+ local unemployment. I'm curious to see if other companies are following Dow's Midland, MI experience wherein (check my info) they have outsourced, but with the stipulation the outsourcer hire their people and set up locally. This may sound like a significantly higher cost option, but then again maybe not. If the outsourcer can drive producivity through process redesign, etc then they can add in work from other firms in unrelated industries to provide a growing payback for all concerned.

4- There is a need for both labor arbitrage and "value-add" offerings. The latter is the only way for sustainable business growth, unless you are the low-cost leader willing to follow-the-sun on labor rates. There is an open avenue, however, for improved value add, if you work from the inside. That is, apply the "intimate contextual knowledge" from within a company to provide much more than operating cost savings. This is a vote for "captives", but the savings can be achieved as well by an outsourcer with the right attitude/goals and retained operations. I'm attaching an article in SSON where I discuss the power of business-based savings along with the leverage of improved Customer Satisfaction levels.

That's My Two Cent,s and thanks for the opportunity to comment.

Terry Hartmann, CMA, CFM

[James Bupp]

It's all about cost.

If the concern was as a change agent, to review the manufacturing process and streamline it, that could be done without the need to outsource. But I don't hear, 'let's review our process and maybe outsource', I only hear, 'let's outsource and save money.'

[George F. Franks, III]

Phil,

Outsourcing provides "both".

Companies and organizations should stick to their knitting. In other words define what their mission is and focus on the skills and resources to be in the top tier of developing and delivering those products or services.

All other functions are fair game for outsourcing - best possible services at balanced with the lowest reasonable cost for that service.

Change agent comes in as a matter of focus e.g. what a company or organization is really about. The mission focus.

George F. Franks, III

[Eric Van Wetering]

'Cost only' is a very 1-dimensional way of looking at a business question. A short term (cost) gain may (sometimes after years) lead to a long term loss. A recent example is that of high quality sportswear suppliers losing marketshare to Chinese suppliers they originally outsourced to.

There is a difference between outsourcing and partnering for instance. And there is a difference between outsourcing to a supplier that can become a competitor.

A short term view analysis may well have a different outcome when comparing it to a long term view analysis. A well balanced approach is required and of course cost will remain one of the most important factors,

Eric

[Lee Ann Moore]

Phil - I echo Andrew's comments as we are looking forward to more data from this report, but a couple of comments on these results.

Our clients have revenue well in excess of $3B, and while the cost reduction theme is strong, the demand for flexibility prevails. Many of them see their greatest opportunities for growth overseas and are trying to manage those investments while balancing contraction in traditional, local markets.

I also think it is interesting that the smallest companies place so much emphasis on global operations as companies in this size range are often local/regional businesses. Is this a signal of an offshore wave to come among smaller companies?

Lee Ann Moore

[Stephen Harvard Davis]

Phil,

I think that this is a very pertinent issue given the current business climate.

With business being strained to increase sales and growth and the need to restructure teams to make them more productive it is inevitable that consideration will be given to introducing change catalysts into the business.

From research into our clients needs we have found that most will consider the cost as well as the required results and whether they have the internal capability to generate change when sourcing change catalysts. (If not then we generate the discussion)

We often find that if the objective is to introduce new ideas, skills and expertise in order to create growth then the cost seems to reduce in significance. If, on the other hand, the reason is to drive through change that has already been identified then cost considerations seem to come to the fore! (often an internal change catalyst has been identified)

However, the ability to finance change programmes will be a consideration for the business whether it is large or small. In such circumstances businesses are often prepared to take "a risk of failure" in order to reduce costs. This is invariably done without analysing or recognising the potential additional costs should the change programme not be successful and without taking account of the high failure rate amongst resructured teams.

Stephen Harvard Davis

[John]

Phil,

My firm signed a BPO engagement because we couldn't change the inefficient way we were running our shared services. Outsourcing was the only way to break up the bureaucratic straglehold several managers were holding over us. It forced us to completely revamp our finance organization, while taking out 30% of cost. So it was about forcing-change using cost-reduction as the business justification to do it,

Excellent data and insights - can't wait to see more,

John