Respite in Recession: Outsourcing
In
today’s harsh economic environment, organizations are leaving no stone
unturned to cut corporate waste and pull off enterprise agility.
Obviously, outsourcing is being considered a practical answer to the
cost-cutting challenges confronting global organizations. To know the
current state of affairs in the outsourcing market,
Rakesh
Raman
of My Techbox Online discusses an array of issues with
Stan Lepeak, managing director of global research,
EquaTerra, a leading market research firm
specializing in business process outsourcing.
Here’s the Q&A account of the discussion.
In the current recessionary phase when companies
are trying to trim all sorts of costs, which market verticals will
benefit the most by outsourcing their operations and how?
The vertical markets that are in the most
duress can potentially benefit the most from the successful use of
outsourcing as a tool to both reduce costs as well as reduce/defer
future investment costs (e.g., into IT, new hires, process improvement
efforts). The most obvious in the short term is banking and financial
services but several other industries (retail, CPG, automotive,
transportation) are also in need of some of the benefits that
outsourcing can bring. Government/public sector is also facing
difficult times (with declining tax revenues, unfunded mandates, aging
workforces) but here straightforward outsourcing is often less an
option than the creative use of other types of alternative service
delivery models like shared services.
Is cost-cutting the only factor for global
companies to use the offshoring option?
Not at all. Rather, cost avoidance is
also a potential benefit. More broadly, however, access to talent,
diversifying the supply base, developing global 24x7 delivery models,
leveraging local assets already in place, and using offshore work as a
springboard to enter local markets are all additional potential
benefits organizations can gain from the use of offshore outsourcing.
To ensure information security and quality of
service, won’t it be wiser for global companies to have their own
captive business process outsourcing (BPO) centers in the traditional
low-cost destinations?
Potentially but not always practically.
Information security and quality of service are attributes of a well
run operation and that does not automatically mean it must be
run/owned by the western firm. Indeed, in some cases local providers
with more scale, expertise, and experience can better establish and
run a quality operation. While in some cases, for example for
regulatory purposes or to protect sensitive proprietary information, a
captive is the best option, in many others greater leverage of third
party services is the better route. History to date has shown that
many western firms have struggled to fully optimize their offshore
captives often for reasons of scale and experience.
As cost is considered the bait to grab global
outsourcing contracts, a kind of price-undercutting has virtually
begun among the competing nations, as now new suppliers are also
coming from different parts of the world. Can this be controlled to
keep the market organized?
Competing solely on price is a losing
strategy in the long term for any service provider or market. In
addition to diminishing cost advantages due to wage inflation and the
opening or new, cheaper markets elsewhere, currency fluctuations can
also impact cost advantages and broader geopolitical events can also
impact the desirability of a location. Also, within a market, if
price levels are relatively equal then differentiation must come from
other areas or attributes. It is not so much a question of
“controlling” – which ultimately is not possible – but responding to
inevitable trends by developing other forms of differentiation like
greater skills, more value-added services, etc.
Can you suggest some global standards or benchmarks
that can be used to empirically measure the service quality delivered
by BPO units?
Measuring the service quality will vary
depending on the specific types of BPO services. Call center work is
very different from back office finance, accounting services from
“knowledge” related services like R&D. Measurement programs need to
be tailored to the type of services. There are basic metrics around
service levels that can be defined contractually but often more
subjective measurements, based on specific service attributes, are
also needed. Additionally what is an “adequate” service level will
vary by situation, deal, etc. So while global standards and quality
programs (e.g., ISO, CMMI, Six Sigma) are important, they are just one
aspect of ensuring or measuring performance.
Today, what are the critical factors for a client
organization to consider while selecting a service provider?
Beyond ensuring the provider has the basic
capabilities and credentials to deliver a specific type of service,
there are several other attributes to assess. These will vary
depending on the type of services being considered, but can include
vertical industry capabilities, experience, global service delivery
footprint and capabilities, scale, and financial stability. There are
also “point in time” attributes that buyers need to address, like
current service provider capacity levels, prior direct experiences,
and the degree to which engaging a provider expands or consolidates
the buyer’s supplier base. In today’s economic environment buyers are
often more focused on supplier consolidation/rationalization as a
means to gain economies of scale, reduce overall costs and speed the
implementation of new efforts to meet shorter term business needs.
Will the U.S. continue to be the major buying
country for outsourcing services or will it change?
Demand in the US will continue to grow,
driven by difficult economic times as well as the general expansion of
the use of outsourcing and the ongoing globalization of the service
delivery market. Recent election results will have some negative
impact on outsourcing growth but it will be minimal and more
rhetorical than actual. Additionally, while in some cases deal flow
has slowed given broader market turmoil, buyers today are increasing
their focus on the use of outsourcing as a means to reduce and avoid
costs and access global talent pools. So while the nature of the
goals desired from outsourcing and the types of third party services
used will change over time, the basic growth of outsourcing will
continue.
