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Outsourcing: Persistent Systems Interview (Part 14)

Posted on Saturday, Jun 12th 2010

By guest author Tony Scott

The Challenge of Internal Cultural Change

Tony: From what we’ve heard and what I’ve seen with my executive search clients, to find that kind of person who can culturally work in a consultative, solutions-driven environment, you need to find people with both expertise and a positive, proactive mindset. One of the big issues that I often experience in conducting searches for senior executives for companies shifting from a low-cost labor arbitrage model to a high-value model is that it is very hard to transition the human side of the equation. It is a big cultural challenge for most organizations.

Anand: I think that’s a fair point. But the thing is, if we don’t do this transition, what will happen? It’s not like the outsourcing is going to go away – actually, more of it will happen. The problem is that it is going to happen at an ever lower cost where customers are going to benefit much more. If we use the current cost structure and change the model to provide much higher value at the same cost point, that won’t work financially for us. There is an opportunity to charge more because the value being provided is very different, but it’s a competitive environment. Once you discuss the model, somebody else can also say that they ca do the same thing. Other people might put price points which are lower.

Tony: Either because their costs are lower, or because they use it as a low-cost “loss leader” to get in the door with a customer.

Anand: Yes, that’s definitely one issue we have to deal with. What we are trying to do is cost plus, rather than value minus. There is a chance that someone might try to position at a very low price, and that’s one of the big risks of the outsourcing industry.

Tony: Do you see increasing competition from lower cost labor environments?

Anand: Yes, I am sure that will happen. But as I pointed out, I think that labor arbitrage-based outsourcing isn’t a huge opportunity for us. I believe that product companies will have to build products at one third the price of what they are trying to build today, and unless they think completely out of the box about how to build these products at one third the price, they’ll not be able to make it. A large part of what drives my prediction is actually not very rosy in terms of where the software industry will be in the future. I believe the software industry will shrink. The CIOs’ budgets are going to shift by 25% getting allocated into cloud computing. Over the years the overall budgets are going to go down by 10%–20%, and as CIO spending drops by 10%– 20%, they will be forced to use the cloud even more. I see that as the only way they can deliver the service that they want.

Once that starts to happen you are looking at a 20%–25 % reduction in the market size. It’s going to come out at the expense of application software, custom software development and product development. Product development is all going to be about building the product faster, quicker, and cheaper. And as you start to get into that kind of a business model you have to think very differently. And that’s an opportunity, because it’s a disruption. How one deals with it is going to be the key to success, so that’s where I am headed. I favor off-shore, but it can be happening anywhere in the world. You could do all of this in the United States as well. The scale of how you need to operate these kinds of models, the ability to respond very quickly, the ability to put out products very fast, those are the keys to the game. Getting more and more to happen more quickly at lower cost overall is the key.

This segment is part 14 in the series : Outsourcing: Persistent Systems Interview
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[…] is a chance that someone might try to position at a very low price and thats one of the big risks of the outsourcing industry. Tony Do […]

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