By guest author Tony Scott
Labor Arbitrage or Value-Added Services?
Tony: Let’s talk about labor arbitrage and the drive to outsource, because that’s one of the big questions around outsourcing in general. Many people have the perception that outsourcing is about only labor arbitrage. What percentage of your business do you think is labor-rate arbitrage versus value-added services, services that customers are buying because of your domain expertise?
Jean: It’s a little bit of both. Customers want the labor arbitrage, but they also want somebody who understands the business, so they are willing to pay for front-end capability that works in their office and on their site. They want someone who gets their business and consults with them, leaving them in a position where they don’t have to deal with or manage some “off-shore” thing. We are able to take care of that for them, and we use off-shoring where it is appropriate, and don’t use it where it isn’t.
Tony: How are people reacting to your value proposition in terms of providing outsourced IT services from China? You obviously are competing with Indian outsourcers, so what is the value proposition that you are winning with?
Jean: We’ve found that it’s very hard to get into the big guys, into the Fortune 2000 where they already have a vendor management organization. These companies already have Indian providers. They have a rate card, they are very happy with those relationships, and all they care about is the rate per hour.
Tony: So they are looking for pure labor arbitrage.
Jean: Right, and that’s all they want for us to compete against. That doesn’t make a lot of sense; we have tried and it’s very hard to compete with that. Not that we couldn’t compete on price, we could, but that’s not what we are about.
Tony: Certainly at the end of the day, everybody competes at some level on price though, don’t they?
Jean: Exactly, but what those other companies are providing is a commodity. Those Fortune 2000 companies are very happy with their Indian providers, especially this past year when the financial services market just crashed. Their Indian providers dropped their rates. Where they used to have wage inflation, they don’t anymore, and where they used to have a high turnover rate, they don’t anymore. All the things that were facing Indian providers as challenges in 2008 were not an issue in 2009.
Tony: So, you are saying that the Indian providers are seeing less wage inflation and lower turnover then they were previously because of the downturn?
Jean: Right, exactly. They have people on the bench and they were willing to take a lower rate. So for us to go in on a commodity basis and compete with them on price, well, we decided not to play there. We will play in the next tier of customers, the middle market that hasn’t been served by off-shoring. It’s too small for the big Indian guys to care about. They don’t call on players in the middle market; they are just not interested.