Thursday, August 09, 2007

Indian Outsourcers To Outsource. Is The End Nigh?

A year ago I put a post up that India's business process and IT outsourcing boom was peaking. Trends never last forever and there are many macro factors that will strain this current bout of offshoring. Not the least of which is that the talent pool in India has become such that anyone with a heart beat is getting a job in that business and labor rates for extremely marginal talent have skyrocketed. This same phenomenon happened in the late 1990s in the U.S. where IT salaries for marginal talent doubled and tripled in a period of a few years. This will ultimately self correct as companies experience weakened productivity, poor customer satisfaction and spiraling costs associated with these contracts.

Now we read in CIO magazine that Indian outsourcers must start offshoring to survive. It's actually quite predictable that Indian companies must tap global talent and become borderless multi-nationals in an effort to remain relevant. In fact, Indian business process and IT outsourcing firms run the risk of rapid irrelevance without transforming their businesses. That transformation requires a deepening and broadening of their intellectual capital beyond cheap labor.

The easy money in business process outsourcing has been made. Now comes the re-evaluation of the fields-of-gold that were promised by consulting organizations encouraging companies to offshore. I would estimate a significant number of outsourcing projects that started the offshoring movement did not yield the hard returns promised (significant precedence) and many softer returns such as client satisfaction, lack of business integration, lower productivity, lengthier product and process cycles and other data points have suffered. As someone who has worked with and for business process outsourcing organizations, I was always cognizant of one key data point: If a company wants to outsource to lower costs, the project will ultimately fail. There are exceptions such as very labor intensive, low margin manufacturing including toys, clothing, shoes, etc. But, that didn't stop weak or short sighted management in many companies from offshoring for that reason alone. The point? Outsourcing and offshoring is not a cure for weak operational management. If one cannot control costs and improve processes in-house, there is no reason to believe outsourced projects will be any different. A vast majority of said circumstances will ultimately cost more money than status quo. Therefore, many of the pioneering contracts could very well return from whence they came at end of term putting pressure on the offshore BPO space.

As an aside, let me make a final comment. BPO, IT outsourcing and manufacturing outsourcing are innovations which found their roots in the American, European and by inference other flexible economies. Offshoring is simply an extension of outsourcing. They are not innovations of India in the services space or China in the manufacturing space. Both are beneficiaries of innovations by other economies. Now, there were some brilliant entrepreneurs in these countries who took opportunity to create great companies. But, as such, they must move beyond the initial lure of cheap labor into value added solutions as Taiwan has so successfully done or ultimately become marginalized against the next wave of cheap labor in the upcoming near-sourcing economies. India and China have been given tremendous opportunities. They must transform or lose the seed of opportunity that has been planted.
posted by TimingLogic at 6:52 AM

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