IT Outsourcing: Quo Vadis?

There has been continuing debate, increasing of late, about where the IT Services industry is headed, and more importantly, what is the future of offshoring and global sourcing? An esteemed ex-colleague and a good friend of mine recently posted his views on the subject.

Because most of the IT Global Sourcing is concentrated in India, developments affecting Indian economy do end up playing a significant role in the evolution of the IT Services industry. In my opinion, there are broader, in fact even structural factors at play that the industry is marching to the tune of and will ultimately decide the fate of what we call as IT Services today. Some of these will support increased global sourcing, and some may dampen it overall. I will touch upon a few of them here in this post:

1. Structural changes within major IT Services providers

EDS recently announced that it is paring down its US workforce by as much as 12,000 employees within the next quarter to rebalance its global footprint and in all probability increase its presence in India primarily. IBM’s Indian workforce has more than doubled in two years, to 53,000 – about 15% of its worldwide total. Accenture’s India story is well-known too.

What is happening in IT Services space is not new – the script is almost unchanged, except for names and locations, from what transpired in the Automotive manufacturing and then in the Consumer Electronics industries. Most of the production and parts manufacture is now done in locations that are considered remote from the end-market or even where the Auto companies are headquartered. What is new of course is that the IT Services market is now maturing and beginning to take on the modular characteristics of some of its predecessors. EDS, IBM and Accenture are beginning to adopt strategies and structures to fend off the ‘emerging’ competitors like Infosys, Wipro and TCS, just like GM, Ford and Chrysler tried to, in a different era, against the Toyotas and the Hondas!

Strike One in favor of IT Global Sourcing!

2. Educational requirements for performing IT Services jobs

How many of IT jobs in the US, esp those being done in-house by companies, and even many of those being performed by the traditional IT majors, are done by engineering graduates? Empirical and anecdotal evidence based on what I come across in outsourcing deals tells me the percentage is much lower than 50%, maybe even closer to 25% (will appreciate if someone can point me to some authoritative source about this)! And now guess the answer to how many of these same jobs, once globally outsourced to locations like India, are performed by those whose primary graduate degree is engineering? Close to 100% won’t be off the mark!

This points to an asymmetry, which when confronted with the job market realities in India (supply-side challenges in terms of number of engineering graduates, rising salaries etc), should slowly resolve itself in a manner that allows for many more non-engineering graduates to become part of the IT services and outsourcing bandwagon in India as well. Most of today’s graduates, even if not engineers, have been exposed to IT and have the basic smarts to learn the techie concepts; further, with the increasing prevalence of IT and technology in our lives, some of the aspects in terms of service delivery are getting demystified enough that a well-structured training course can plug the gaps and create qualified human capital for the future.

I know of companies that are already exploring this route to build scalability and long-term growth for this industry in India.

Strike Two in favor of IT Global Sourcing!

3. Increasing Automation in IT Services Delivery

I mentioned modularization of IT services as a factor in the increasing globalization of its delivery in the first point above. That very same modularization is also leading to increased automation around IT services delivery – whether it be SaaS (Software-as-a-Service) or Platform-based BPO (where the entire vertical stack consisting of Infrastructure, Applications and Business Processes is delivered using a Proprietary or Shared Technology Platform), to name a couple of impressive-sounding buzzwords in the industry today.

Higher automation will surely lead to an increase in productivity; it is also likely to lead to lesser need for the labor component of IT services, something that has fueled the global sourcing wave (although the motivations have changed as the industry has matured, moving beyond costs to quality and risks). Why outsource in a conventional manner when you can automate? – that will be a thought that will start popping up more frequently in the years to come.

Ball One against IT Global Sourcing!

With the game thus interestingly poised at 2-1, I will take a break here and await your comments before continuing the dialog on this topic.

Five Disparate Global Sourcing Objectives: A Conundrum?

We have heard these before and will hear them again in sourcing deal after deal, as the list of Objectives from the Global Sourcing initiatives that an organization is embarking on. And in deal after deal, there will be those sighs and groans as the solution team tries to figure out how to reconcile these seemingly disparate objectives into one elegant package:

1. Efficiency with Innovation

Sourcing initiatives typically begin as a means to get the house in order, eliminate inefficiencies, control and lower costs etc. However the benefits desired do not stop once those are achieved and extend to creation of new value through innovation and transformation. Innovation is expected to follow its humble cousin, Operational Efficiencies, as a natural progression and that too in quick succession!

Now, only if the scope coverage, contractual mechanisms and pricing formats were to support this…On the deals I have worked on, I have mostly come across one or two sheet, unformatted response templates when it comes to proposing Innovation, as compared to scores of defined forms for the Operational Efficiency aspects!

2. Quick Transitions with Minimum Disruptions

Companies want to complete transition quickly but do not want transition to impact business. Obviously a quick transition helps in avoiding the dreaded ‘bubble’ and also reduces risks due to attrition (quick transition = less time for people to react). But it could be potentially disruptive to business if it requires more intense effort from key personnel. Traditional outsourcing used to take care of this using a 100% people and asset transfer model (Your Mess for Less)! In case of Global Sourcing (as opposed to just Outsourcing), more creative models are required to reconcile these two disparate objectives.

3. Low Risk with Maximum Savings

Sourcing initiatives are not just driven by a need to save costs, but also by a desire to minimize risks (the latter part is not usually verbalized, but is key in terms of decision criteria). So, while the price point is being watched carefully, enough attention needs to be paid to the service provider’s capabilities to deliver and for both parties to achieve their objectives, esp in a global sourcing scenario. This trade-off between price and risk is not captured in either a typical T&M pricing or a regular Fixed-Price model. New pricing models and deal structures are being discussed and talked about, but are yet to become the norm.

4. Accelerated Results without a Learning Curve

As the business needs become more critical and the urgency increases, there is intense pressure to achieve accelerated results, while avoiding the pitfalls and mistakes made by past adopters of different kinds of sourcing. Companies do not have the time to go through the learning curve, and they pass this pressure through the sourcing eco-system. Additional players, other than just the service provider(s), whether internal or external, are required to take on pivotal roles, both before and after the contract is signed.

5. Capability with Reassurance

Companies want world-class capabilities, and they want ownership and control to the extent possible. Ideally they want both at the same time. No wonder, several of them are still struggling to come to grips with whether to Outsource or set up a Captive as part of their Sourcing Strategy. If only the choice could be made easier for them?

How does one handle the above set of disparate objectives without tying oneself up in knots? Now, that will be like giving the store away, right…..:-)

The GSS principle: It is Global Sourcing, Stupid!

Words are like people - some lose their distinctive flavor over time and some get confusing to those who come across them. And some start sounding the same as another: there is even a popular theory that several years after marriage, a couple starts looking and talking very similar to each other.

The words i am referring to in this post are 'Outsourcing' and 'Offshoring'! They had distinct identities several years ago, when the world was still a little round. They reflected the Cold War mindset - there was a First World (US and other western developed countries), a Second World (USSR and its communist allies), and a Third World (underdeveloped, probably hopeless, countries in the eyes of the beholder). Outsourcing was associated with getting work done by a vendor who belonged to the First World; Offshoring was linked to sending some bits and bytes to an emerging Third World country (usually India) that would do it, like, ten times cheaper. No one cared about what was happening in the Second World when it came to business processes and IT services...

This was the world in which the IBMs and the EDSs of the world prospered, and in which some of the top C-level decision makers in F1000 companies grew up in. And it shaped their thinking and worldview.

Suddenly the World became Flat. It didn't happen overnight, of course, and Thomas Friedman just happened to write about it sooner than others could, but the boundaries started disappearing ever since the Berlin Wall fell, and one day it was like ....poof! Flat as far as a technology eye could see...

Words which made sense then, no longer do so now. But some people still hold on to those without realizing that those labels do not fit what they are trying to describe and ask for.

I met a top level decision maker at a leading telco in the US two weeks ago and there it was,

'...we are going to consolidate our outsourcing services providers', and 'we
consider you more as an Offshore services provider'

And in a quarterly presentation from a leading sourcing deal advisory firm...'the offshore players are..., but the outsourcing players are...etc.'

One of the first influential organizations to get this nuance was Gartner - 3 years ago, they stopped having two separate events around Outsourcing and Offshoring, and instead rolled them into one per year, called Gartner Sourcing Summit. The nuance they got was simple - it is no longer about 'Outsourcing' and 'Offshoring'; it is all about Global Sourcing. If Bill Clinton were to describe it, he would say, 'It is Global Sourcing, stupid!'

Why is it so? Well, firstly the traditional outsourcing model (your mess for less) and the traditional offshore model (your work for less) are both being replaced by the Global Sourcing model that places an emphasis on doing the work where it makes most sense, sourcing resources from where they are the cheapest and the best quality, and delivering where there is the best client interface. So, even the First World outsourcing companies are being forced to do service delivery from globally distributed locations - IBM and Accenture have added more people in India in the last 2-3 years than anywhere else in the world combined. And companies like Infosys have shown strong propensity to bid for and win large outsourcing deals that they were traditionally not even invited to.

Secondly, technology has made it possible to move most of the services work to global locations and manage/deliver them from remote centers. Technology has also digitized the scope of services so they can be easily disaggregated and then re-aggregated.

Thirdly, offshoring became mainstream and came of age. Thanks to the Y2K crisis and the dot com boom - the quality aspects of the so called Third World service providers came across very strongly. Sourcing to offshore locations and taking advantage of the talent available at a cost basis that was several times lower became a topic of discussion in the corporate boardrooms.

They key difference now is that one of basic aspects that goes with Outsourcing - stepping up to take ownership of deliverables, portfolios and service levels in a fixed price model- is being provided by leading global service providers like Infosys as well. And they are going futher by incorporating transformational solutions as part of a Sourcing relationship, so that the client continues to derive value even into the future.
Going offshore doesn't just mean sending projects or discrete tasks. There are just two kinds of firms now - those that can take on ownership and deliver work from anywhere in the world and those that cann't.

And i fail to understand why someone would want to limit their sourcing strategy to the traditional models and providers or outsource to a service provider which cannot or does not practice a Global Delivery Model.

Next time you meet a client or give an internal pitch to your colleagues, look them right in the eyes and tell them the truth: Outsourcing and Offshoring as passe terms, they are actually sub-sets of what we should be discussing and talking about, which is Strategic Global Sourcing.

Tell them the GSS Principle: It is Global Sourcing, Stupid!