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Is Outsourcing Dying Or Thriving? (Part 4)

Posted on Sunday, Mar 28th 2010

By guest author Tony Scott

The Double-Edged Sword: The Flat World

A few years ago Thomas Friedman’s “The World Is Flat” became a global best seller. One of that book’s key areas of focus was examining the immense change that lower-cost, effective global communications was causing by enabling back-office call centers and IT support work to be provided in lower-cost labor environments, particularly India.

It is clear that India has benefited immensely from this movement over the past ten years. Numerous companies (both Indian and non-Indian) set up call centers and support operations in India to take advantage of the significant labor differential between U.S. skilled labor and its equivalent in India. With wage rates on the subcontinent being one-fourth to one-fifth of those in the United States, companies simply could not ignore the potential impact on their bottom line.

The call centers and IT support centers were set up very much like those in the United States: a central building or group of buildings that housed hundreds or thousands of workers, densely packed like a beehive. The workers have calls routed to them by expensive automatic call routing equipment and work on desktop clients connected to servers running sophisticated software to track and manage the incoming calls so as to maximize efficiency.

This model had worked for well over twenty years in the United States for outsourced call centers – all India was doing was replicating the model and providing a lower cost labor component. And in India, it perhaps made even more sense to try to consolidate the call center operations rather than disperse with somewhat smaller units in multiple locales. After all, traditional switched telephone lines were expensive and difficult to bring on line. The equipment and systems needed to operate a call center were also expensive and required sophisticated support. Having fewer large locations also made managing the utilization of the workforce somewhat simpler.

Add to that the need for a constant supply of power to insure the call center never “went down” meant that companies often had to build their own electrical power generation source for their centers – or pay to have the infrastructure built to bring utilities to their centers. Of course, it is usually much more efficient to build or bring power to a single large locale than multiple smaller ones.

Then the great boom in telecommunications started to kick in. Telephony over the Internet (Voice Over Internet Protocol, or VOIP) became more and more common and of higher quality. And as more undersea telephone cables came on line, the cost of making or receiving a phone call dropped dramatically.

At the same time, Indian wages increased and it became increasingly difficult for latecomers to the Indian outsourcing game to attract and keep skilled workers. Companies started to seriously evaluate locales other than India as options because of the wage rates, difficulties in attracting and retaining talent, and complications in managing operations that were halfway around the world and in completely opposite time zones.

The main variable component for a call center is labor cost, which has led the companies providing outsourced call center operations to continuously chase the next low labor-cost countries to put in new operations and/or move existing operations. In the early 2000s the Philippines began to emerge as a favored alternative for call center operations. In addition, locales in the Caribbean and Latin America sprung up for call centers serving North American clients, and a number of Eastern European and North African countries saw the build-out of call centers serving European clients.

All of the call centers in the “new” locations still followed essentially the same model: big buildings with big telecom pipes coming in to them; and hundreds or thousands of workers being fed call after call automatically by sophisticated systems. As noted before, those centralized call-centers require a not-insignificant capital investment to build and equip.

Let’s say a company followed the trend of seeking out the lowest labor costs and built a call center in Timbuktu to take advantage of newest lowest labor rates in the world. But, after it was built and staffed, there wasn’t enough volume business to turn a profit, or the utilization of the agents was too difficult to manage to control costs?

Workers, of course, want to work on known schedules and be paid for the hours that they are at the job, regardless of whether they are busy. Call center operators must keep their workforce as close to 100% utilization as possible – every minute a call center agent is not on the phone is a pure cost.

That puts huge pressure on outsourced call center operators that are proving nothing more than labor arbitrage. That pressure encourages off-shore call center operators to lower pricing as long as they are covering their fixed costs when times are difficult. Of course, the customers and potential customers of outsourced offshore call centers aren’t ignorant of this trend and are happy to take advantage of it – thus creating a vicious cycle in pricing and margins for services that have been outsourced purely or predominantly because of labor arbitrage.

The “flat world” of low-cost global communications has enabled and encouraged this trend of companies seeking to find ever lower-cost locales. But the evolution of the “flat world” now provides an interesting alternative model that can enable a mix of off-shore, near-shore, traditional large centralized call centers, dispersed smaller centers, and even completely virtual call centers with agents working from home.

In the next segment of this series I will share the results of my interview with the senior management team of a U.S.-based outsourced call center services provider that is increasingly moving to a virtual call center model staffed with home-based agents. You’ll read how their model helps them to attract and keep great talent at a lower cost; manage utilization more effectively; and cut capital expenditures – all while maintaining or increasing customer satisfaction.

Their model has already begun to prove its potential to lower costs for domestically provided call center services, further reducing the already diminishing labor rate differential between U.S. on-shore and off-shore – giving these call centers a huge advantage over many of their domestic competitors. But as you might imagine, this model also has the potential to massively disrupt the traditional “brick and mortar, hub and spoke” call center model used by outsourcers around the world.

This segment is part 4 in the series : Is Outsourcing Dying Or Thriving?
1 2 3 4

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Funny. If wages rise, why would “latecomers” alone be not able to attract talents?

Funny. If BPOs are pricing to recoup marginal costs, how come most Indian BPOs are reporting huge profits?

Funny. BPO is not about “selling” worker time (so that it can be “virtualized”). BPO is about “creating value”. Indian BPO firms understand that. That is why they have grown to world class sizes.

Vikram Sunday, March 28, 2010 at 4:38 AM PT

All services over a period of time become commodities and once they become a commodity the value creation/added value whatever you may call it diminishes and then the price war starts between the existing players and the newcomers. Once this happens the customer is theonly beneficiary and it is extremely difficult to optimise the utilisation levels which eventually results into lower profits.

Ashit Shroff Sunday, March 28, 2010 at 9:00 PM PT

I am the CEO of Rural America Onshore Sourcing, an industry leader in the emerging, rapidly growing industry of USA rural onShoring.

For the same reasons, India was “flat”, Rural USA is now “flat”

We started the Company two years ago for many of the reasons stated in the article plus plus several others:

1) India value-added IT talent was becoming expensive. We personally were paying $13.57/hr for entry India talent prior to starting our Company; and then we found USA rural talent for $17/hr.
2) USA companies were being burned on IP protection issues in China and other countries.
3) Large USA finance institutions realized that they were overexposed to potential India terrorism/conflict.
4) Small and medium companies were realizing that hour cost savings were being offset by increased cost of remote managing the projects.

To toot our horn a little: Business is booming for us. 25% of our business is fixing IT and marketing projects that were not completed over seas due to poor quality and/or communications.

We have rural Americans working nationwide on the projects our customers have entrusted to us. We have offices nationwide; currently recruiting talent in 13 states increasing to 50 states by end of 2011.

There will always be India outsourcing. But more and more alternatives are available every year as labor arbitrage seeks new markets.

India labor costs continue to increase. Recently, we won a very large IT Java contract where several India IT companies bid $60 for senior level developers. We bid $65.

USA companies are now bringing their marketing and creative design projects to us as they have tried overseas outsourcing firms and found the cultural and communication gaps too broad.

I hope these comments shed some light on the dynamic and growing outsourcing global trends.

christopher hytry derrington Tuesday, March 30, 2010 at 12:14 PM PT

May I add that with the National Broadband Plan recently released that millions of additional rural Americans will be entering the rural virtual workforce seeking to earn an income that while lower than USA urban professionals, exceeds their rural neighbors.

The volume of resumes we receive on a monthly basis is increasing.

A recent study shows that value-added India IT rates are only on average 17% less than USA rural outsourcing rates.

In our opinion, USA rural broadband is going to change everything.

christopher hytry derrington Tuesday, March 30, 2010 at 12:18 PM PT

While it’s appealing as a headline, a better title for this post than “Is Outsourcing Dying or Thriving?” may be “How is Outsourcing Evolving?” Before I elaborate, my name is Keith Higgins and I’m the SVP, marketing of a company called Aricent (http://www.aricent.com), a global innovation, technology and services company focused exclusively on communications.

Much has been written about outsourcing companies moving up the value chain, and most of it is true. Today, outsourcing has become more vertically-oriented and includes a much heavier emphasis on specific technologies. This means that organizations are turning to “outsourcing” companies for their expertise across a range of disciplines rather than just elastic resources required to finalize a specific project.
The next phase of evolution however, is much more exciting. The market for consulting, design and product development services represents an addressable market of approximately $150B USD / year globally. The convergence of innovation and technology in the product development lifecycle (PDLC), especially in communications-rich industries, has created significant demand for end-to-end strategy, design and development services. This growing need is a poor match to the fragmented supplier landscape, and created a substantial market opportunity for a new category of “outsourcing” company capable of delivering services from strategy through development and delivery.
Approximately 3 ½ years ago, KKR and Sequoia Capital invested approximately $900M USD to form Aricent – combining assets including frog design and Flextronics Software Systems – specifically to address this growing market need. Providing end-to-end innovation through integrated consulting, design and product development services, Aricent helps leading organizations create and commercialize highly differentiated products, services, and business models. This approach reduces technology complexity, time-to-market, and overall PDLC costs. The company offers a high-value process from ideation to realization, helping companies unlock innovative concepts and commercialize them efficiently in their respective industries. Further, the company offers differentiated intellectual property in support of creating and sustaining innovative product and services.
The company, through its divisions, offers 40 years’ experience in developing innovation and technology breakthroughs that have transformed entire industries, including more than 3,000 products and services for 300+ of Fortune 500 companies.
Aricent’s approach is consistent with what the guest author notes in the post, “Ms. Mitra challenged Indian outsourcing companies to move up the value chain towards higher value services and to learn how to innovate and ‘think for themselves’ rather than letting their customers do the thinking for them.”

Helping customers solve product, service and business model innovation challenges, from conception to commercialization, is the future of outsourcing companies, and the fundamental strategy of Aricent. Aricent has delivered this model to the tune of hundreds of millions of dollars of revenue to the world’s leading organizations around the world.

I would welcome commentary and discussion on whether folks believe the outsourcing model has changed. We firmly believe it has.

Keith Higgins Tuesday, March 30, 2010 at 4:19 PM PT

Cost will always pay a very important role in any outsourcing relationship, but we believe that it should be secondary to the desired outcome. Our research at the University of Tennessee has discovered that there are 10 fundamental flaws, what we call “The 10 Diseases” in conventional outsourcing agreements. Foremost among these is “Penny Wise and Pound Foolish”, the practice of searching out the cheapest solution as opposed to the best solution.

Outsourcing agreements of any substance should be based on a “win-win” strategy, one where the company who uses outsourced services and the outsource service provider work together to achieve a mutually beneficial objective. A winning solution is a winning solution regardless of geography where it is contained.

We describe the “Five Rules that will Transform Outsourcing” as:

1 Outcome-Based vs. Transaction-Based Business Model
2 Focuses on the WHAT not the HOW
3 Clearly Defined and Measurable Desired Outcomes
4 Pricing Model Incentives are Optimized for Cost/Service Tradeoffs
5 A Win/Win Business Relationship

I invite you to find out more about Vested Outsourcing and investigate how you can use it to improve your relationships. All of this is describe on our website at http://www.vestedoutsourcing.com.

Kate Vitasek Wednesday, March 31, 2010 at 1:27 PM PT

As a provider of nearshore outsourcing services, Neoris is optimistic about the future of outsourcing. In 2009, when the business environment was unpredictable for the broader market, Neoris continued to grow, more than 60% in the USA alone.

In our experience, a new pattern is emerging in the way that large companies are looking at the IT services provisioning space. Low cost delivery is no longer the key differentiating factor. Value in this space is now determined by the true business understanding that the IT services vendor brings to the table. Large enterprise CIOs expect IT services vendors to provide world class service in alignment with established industry standards across different platforms and geographies. This is key if you want to be in the IT services business. In addition to near zero defects in service delivery, clients are now focused on the domain expertise offered by the provider, ranging from specific technical proficiency to proven knowledge of the clients industry and functional models.

This is no different from what sophisticated CIOs demanded from the traditional IT services firms 10 years ago. The change resides in the fact that low cost delivery through labor arbitrage is now a feature that should be built into any offering. With this change, the lines between traditional IT services providers, Indian outsourcers and nearshore vendors, have blurred. While capabilities among the three groups converge, decision criteria become more complex for IT management.

The vendor that offers the most flexibility and is capable of building trust with IT management is going to be the winner in the new era. When everything is even, the vendor’s ability to more effectively understand the client’s more subtle inner workings is going to win. As we approach the next decade, once more it will be salesmanship and personalized service that will make the difference.

Claudio Muruzábal Wednesday, March 31, 2010 at 2:35 PM PT

Service Providers, regardless of their legacy advantages, must compete differently going forward. At the risk of over simplifying and over generalizing, neither the on-shore providers with long term customer relationships and strong account management, nor the off-shore providers with ever decreasing labor cost or technology cost advantages are well positioned to succeed in the next generation of outsourcing if they continue to engage their customers in a conventional approach.

Partly because of the economic downturn, and partly due to the potential for disruptive economic advantage promised by cloud computing and SaaS, customers are seeking transformation of their IT capabilities and innovation from Service Providers to solve business problems or take advantage of opportunities. Conventional outsourcing relationships focused on activity based contracting and governance will not provide the value required from IT Outsourcing going forward.

Next generation engagement models, sometimes called outcomes based, or performance based relationships that go far beyond gain-sharing are required to unlock the next level of economic and operational benefits from outsourcing.

Capto is partnering with the University of Tennessee to conduct research in the Fortune 1000 to enhance the methodology and tools to deliver this next generation outsourcing methodology. To learn more about the research and how to apply this methodology to ITOS, check out http://www.capto-consulting.com/vested-it/

Tracy Currie Wednesday, March 31, 2010 at 2:58 PM PT