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The New Age of Outsourcing

By Jagdish Dalal, President, JDalal Associates

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Jagdish Dalal, President, JDalal Associates

Niccolo Machiavelli wrote in the 14th century: "Whosoever desires constant success must change his conduct with the times." For the outsourcing industry, that time is now.  It has been almost four decades since the adoption of outsourcing as a credible business strategy.  It has spawned an industry that contributes almost a trillion dollars to the global economy.  Previously, “developing” countries had surged forward as an economic force with the adoption of outsourcing. India has created a middle class that could not have been foreseen before the onset of the 21st century and the same can be said about Costa Rica and Malaysia.

Ironically, it was a set of disruptive forces and events that launched the global outsourcing business. One of those forces was computing and networking technology. It allowed remote locations and countries to participate in a business process effectively and leverage their economic and work ethic principles to compete for business. Data center and network outsourcing were the initial activities that were outsourced, as a result.  A lack of resources to handle Y2K, coupled with higher bandwidth of networking spawned the offshore outsourcing trend.  Remote resources could then be used to manage software changes and at a lower cost than the local resources.  A third and important disruptive force was the entrepreneurs who took advantage of the events and established their presence in the outsourcing market place.

We are entering a new age of outsourcing. There are three new “disruptive forces” that are radically changing the outsourcing business: Cloud Computing, Disintermediation (eliminating steps in the process to streamline it and reduce operational cost) and Global Economic environment. 

Cloud Computing:  

The use of cloud to deliver services is already changing how customers view and evaluate their outsourcing needs.  Cloud services alter the risk equation between customer and supplier. Inevitably, variable demand models with minimal volume commitments shift more risk to suppliers. Cloud based delivery of solution will change not just IT outsourcing services but also Business Process Outsourcing. Cloud based IT infrastructure services is impacting data center outsourcing.  As more infrastructure capabilities are delivered through cloud, customers will evaluate their need for investments in buying products or services.  Microsoft’s offer of Windows and Office software through cloud will encourage IT executives to depend on cloud for their infrastructure. 

Although, it is still immature, I believe that the cloud based process solution is going to dramatically impact how BPOs operate today. Today, customers outsource their business processes and expect delivery of service based on contracted services, service levels and volumes.  As cloud based delivery of services become more common, it will move more towards transaction based contracting for services with a minimal commitment and flexibility for services.  Salesforce.com has already shown how cloud based service will impact outsourcing decisions. There are other HR process solutions that are available through cloud and are already impacting HR business process outsourcing models.

Disintermediation:

Outsourcing literature is filled with articles and presentations on the new topic of “Robotics” or “Process Automation”. These terms define them as improving processes through some form of automation and thereby reducing the cost of operation. It is predicted that they will have a significant impact on the economics of BPO.  It is true but I go back to Michael Hammer’s seminal piece from 1990 that suggested: “obliterate, do not automate” (Harvard Business Review, July-August 1990 issue). Eliminating steps in the process has a deeper impact on economics and service performance than automating steps. 

We have seen and experienced disintermediation directly impacting the world of outsourcing.  Customer call centers were initially entry points for many BPO providers. Some of these call centers have been shuttered down due to disintermediation.  Airline call centers are the best examples of this.  Some 60% of call center work was eliminated by airlines by providing the same service through online systems (think of booking flights, selecting seats). Many of the service oriented business processes are benefiting from disintermediation.  Banking and Insurance industries provide more examples of this.  As “internet of things” penetrates further and more people have access to the internet through intelligent devices, we will see an even higher impact of disintermediation.

Global Economic Environment:

As I mentioned earlier, the advent of higher speed, reliable networks created an offshore outsourcing industry and helped launch destinations ranging from India to Ukraine. Many of the developing, and not quite developed countries benefited from this by exploiting their lower wages and offering services at a significant cost advantage over Western countries.  Some of these countries took advantage of that and built effective infrastructure and became attractive options for customers.  However, recently this lower wage based cost equation has shifted in the opposite direction. There are several factors that have affected this shift. First, the fast growth of outsourcing opportunity has created employment competition in many countries and as a result, employee turnover has increased dramatically. It has also impacted the salary structure for the workers, creating as much as 10% gap in the salary cost versus contracted pricing for the services. Countries that have competed in the past through wage differentials are finding that the gap between their wage and somewhat stagnant wages in developed countries is narrowing. We have seen examples of offshored work returning onshore in the U.S.

Interestingly, these three disruptive forces have an inter-locking effect on the outsourcing industry.  Technology – such as cloud, software as a service – is enabling disintermediation of processes and lowering the wage content of the service.  Outsourcing service providers who have succeeded through lower wages are finding that they now have to move further up the chain in providing value based on technology based solution.

As goes an old Chinese saying – “may you live in interesting times”, which is taken as both a blessing and a curse, the outsourcing industry is going through interesting times.  Outsourcing service providers who recognize the forces of change and adept their business strategy will continue to succeed, while those that are mired in the “old” thinking will struggle. Providers must identify their strategies for mastering these disruptive forces and ride these winds of change.