The Changing Landscape in Offshoring

Globalization, integration of labor markets and IT advancements continue to be the key drivers of global outsourcing. However, offshore outsourcing is evolving and becoming more strategic in nature, slowly bringing about transformational change within companies. Offshoring to mature locations such as India are no longer driven just off the output metrics such as cost and quality. For organizations that have gone beyond the initial experiences in offshoring, it is driven more by considerations such as continuous improvement, speed or time to market, innovation, flexibility and efficiency. In this CEO topic, the first in a three-part series, we will examine the new trends in offshore outsourcing.

‘Beyond cost’ is the new objective of offshore business process outsourcing (BPO). In the past, outsourcing was largely governed by considerations like cost savings, labor arbitrage, reduction of overheads, etc. Companies outsourced only non-core/non–critical activities or only to generic service providers with low cost delivery capability. But that has changed with time. Today, companies seek to capture the full value that global outsourcing offers. They measure the benefits of outsourcing against business outcomes like increased speed to market, reduced defects or rework, lower working capital requirement, new market opportunities etc. Furthermore, considerations such as augmentation of the labor pool, reduced investments in infrastructure and human resources, a focus on core competencies and improved quality and productivity through specialized focus, have emerged.

In transformational offshoring/outsourcing, companies collaboratively outsource both critical and non-critical processes. The critical processes are identified and handed over to a specialist company that leverages its expertise to assist the business to match competition. The skilled and motivated business partner is likely to drive the change far more aggressively than the firm itself. The three most important benefits that drive outsourcing, apart from cost, are superior/efficient IT enablement; improved productivity and increased control.

For many industries, global delivery is an integral part of the business strategy and is key to business growth and success. In the IT industry, this approach is being adopted by most of the major IT companies such as IBM, EDS and Accenture who have spread their work force across multiple low cost locations to expand their business across the globe. Adopting a global delivery approach has helped these companies survive and meet more competitive market conditions and compete more effectively with the large Indian IT and BPO service providers such as Infosys and TCS. Similarly, Lenovo and Dell are examples of manufacturing companies which have adopted a global delivery strategy to enhance its competitive position in the PC and server markets globally.

On the demand side, where outsourcing forms part of a corporate strategy, there is greater inclination to leverage the off-shore model for integrated sourcing of services, unlike the current emphasis on functional outsourcing. Concomitant to the increased emphasis on global sourcing, there is a sharper focus on managing the risks of offshoring, leading companies to consider sourcing multi-location offshoring. The CIO Global Outsourcing Guide says that most of the organizations are evaluating the option of sourcing from multiple locations.

Under the evolved model of offshoring, the offshore service provider brings the following to the table in the form of streamlining processes:

Best Practices across industries for specific functions / activities
Operational discipline and improvements through the use of quality tools
Scale-driven cost reduction because of centralization and standardization of processes
Use of new and standardized technology across all processes across business units, group companies and geographies

Today, with most outsourcers increasing the processes/functions in their outsourcing portfolio, multi-location outsourcing is gaining fresh ground. India maintains its leadership position in the offshore services market due to its low wages and large labor pool and its experience in this industry for over two decades. However, India’s leadership is being seriously challenged by emerging offshoring destinations like the Philippines, Malaysia, Vietnam, East European nations including Hungary and Poland and Central American nations such as Mexico. These new regions are worth watching and exploring as part of an offshoring/outsourcing strategy.

The outsourcing industry which began with offshoring non-critical processes has today grown in scale and diversity. Organizations that embraced outsourcing as a lever for reducing cost now demand much more from their vendors. We have seen the development of outsourcing into its critical three stages. In stage one, the focus is on operational efficiency resulting in cost savings. Stage two shifts attention to process effectiveness resulting in productivity related gains. In the third stage, it is the ability to respond to business demands in a globally integrated approach which is most important, which results in generation of new business opportunities. Today, organizations are and should be planning their outsourcing strategy with stage three as the ultimate objective. In our next CEO Topic, we will look at specific examples of successful outsourcing/offshoring programs. For additional information on outsourcing and offshoring, please contact your GA team.

Kaushik Mazumdar is a Vice President working from GA’s Mumbai office. Kaushik focuses on the GA’s portfolio companies with the objective of identifying opportunities for process improvement, reengineering and globalization. Kaushik has extensive experience in the area of operations and business process offshore outsourcing, having worked in Citibank NA for fifteen years in the area of operations across Corporate, Investment and Consumer/Retail banking businesses. He was instrumental in setting up the consumer operations of E-serve, the BPO subsidiary of Citibank in India.