Roundtable - Sourcing in the Face of a Financial Crisis - Part 2
Q: Let's talk a little about locations.
We were discussing India a minute ago, and the idea that it might benefit a little from the downturn in terms of people postponing their decisions to move out of the country.
Is it too early to pinpoint the winners in terms of locations that might come best out of the crisis? Katherine Kawamoto: I think it depends on what you're sourcing.
If you're talking about services, then I'd say whatever country has the largest talent-pool and the lowest wage inflation.
From a wage standpoint you could look at the US and claim we would be one of the better countries as far as sourcing goes.
Charles Aird: I think India has a lot of issues that may cause them even greater pain during the crisis.
I've lived in India, set up centers there, and am very acquainted with the environment there; but over the last few years the retention issues they have, the escalation in wages, and the perceived drop in quality in both IT and BPO, have caused a lot of frustrations with clients.
So I don't see clients knocking on our doors to say "let's go to India".
More and more they're looking at alternatives: China, Eastern Europe, South America, those countries that started making inroads into what India has been doing.
I think the current crisis may cause even more of that to occur.
Brian Smith: I do think however that this will maybe cause a reduction in the attrition rate in India, which will be a good thing and one that will make people feel more comfortable.
We may also see some change in the underlying economics of offshoring particularly from some of the less expensive regions within the US, and making the business case for doing this may get more difficult.
Tony Rawlinson: I think it's got to be looked at through the lens of what the requirement is, where the point of service delivery is, where the point of service receipt is, and against that backdrop EquaTerra feels that India will continue to be the dominant market for these services.
I think they're going to be helped clearly by the move we've already talked about from captive to outsourced; I think some of the weakness in the global economy is going to feed through to lower wage inflation in India which might address some of the frustration that was mentioned a minute ago.
We see China maturing but frankly not rapidly enough to be a universal service delivery response, and clearly Eastern Europe has its supporters mainly around continental European customers who take a more conservative approach to risk.
This is very much an Anglophone discussion and we're seeing the emergence of places like Morocco serving the French market, for instance, and we've talked already about Brazil serving the US market.
I think overall our view would be that India will continue to be the big player but we'd also see a "horses for courses" approach being taken by clients and a recognition that risk needs to be managed on a global basis: it doesn't make sense to have all your services running out of one country.
Phil Fersht: I can add a little additional perspective on that: let's look at the types of services that are being outsourced to different locations.
When you look at IT, I think India has developed a very strong position now delivering high-quality programming, application development services, at labor costs often a quarter of what you'd find in places like the US or UK.
I think that's just going to go from strength to strength as that model matures.
They have a real industry developing, with strong training programs and very strong footprints.
I think a broader area where it's still an open game is BPO, and when you look at the fact that you can hire BPO staff for $25-30,000 a year in rural areas of the USA, the arbitrage trade-off with India and other countries isn't that great - and if Obama takes power and gives even further tax breaks to incent countries to onshore, I do think that nations like the US - and even the UK - are still in the game.
And I think that that's going to be the area where we're going to see some change globally.
Don't rule out the Latin American countries for providing voice services and employee services and things like that.
But I think on the IT side it's almost a done deal now: I think India has cemented their footholds, they're moving into the European markets, they'll develop intelligent resources in the US and the UK and other places to service their clients.
It's more in the BPO area where we're going to see more variety, and different countries offering different unique characteristics.
Katherine Kawamoto: It seems to me that wage inflation is such a key factor in these decisions; a couple of people have mentioned Brazil, but if you look at the inflation there that seems to be on the rise - or at least is trending in an upward direction.
Globally these are really tough decisions to make because the economies themselves are so unpredictable at this point.
We really can't predict with any certainty what to predict in the way of wage increases.
As to the point about Obama: I think it will have an impact; I don't know how soon it will have an impact, however.
I'm not as certain that these things will turn around as quickly as some of the panel have indicated.
I really think this is a much longer-term issue that we're faced with.
Tom Tunstall: I think there are some things that - no matter who's in office - will preclude an easy repatriation of jobs, if you will.
With the electronic mechanisms available, some of that stuff is going to be fairly difficult, and frankly a lot of the jobs that do get outsourced are on the lower end whereas jobs created through outsourcing often are managed in the US and tend to be higher up the value-chain.
The idea that whoever happens to be in the White House will affect these things greatly is likely oversimplifying things a bit.
Global macro effects override a lot of that.
Charles Aird: I think I'd agree with that.
I'm pretty cynical about election campaigns - and we went through a lot of this same rhetoric in the last campaign; some of you may remember Lou Dobbs and all of those things.
And then we didn't see a great deal of change.
Obama will more than likely win the election - I can't imagine him not, given the way things are going these days - and I think the issues he will have to face when he becomes president are much larger than what's happening in outsourcing around the world.
Tony Rawlinson: I think it's maybe worth looking at this more holistically as well as from a service provider perspective.
The Indian players are becoming global players, the MNCs have deepened their investment in India and other low-cost economies.
I think the successful service providers are going to be able to load-balance their client requirements across multiple geographies - so actually it's probably going to be smart in many cases for clients to let the service providers take those decisions and let the economics of the deals drive where the requirements are placed.
Q: That sounds like another reason to be concerned about the future of the captive model.
Tony Rawlinson: I think so, overall - although we shouldn't be too black and white.
Yet another driver here that we need to look at - and I'm not sure I know the answer to this one - is there have been signs in recent months, until the credit crunch, of wage price arbitrage not being the only driver of offshoring.
It was increasingly coming to be seen as an acquisition of capability.
So I think potentially what we're going to see at least in the short term is a reawakening of the wage price arbitrage driver and I do think to your last point that that's going to be associated predominantly with outsourcing.
Q: OK, let's move on.
How can people in the industry best mitigate against the worst effects of the crisis in the short-term - what are the easy wins which can at least lessen the impact of what we know is going to be a pretty lengthy downturn? Charles Aird: Somebody mentioned this earlier: for a lot of clients maybe it's time to take stock of the relationships they already have, and improve their governance and performance management.
We see a lot of organizations that get through the honeymoon period - whether it's captive or whether it's a service provider relationship - and they're not getting out of the deals what they expected to get.
And quite often it is those two areas: the governance is poor, the training on both sides between the client and the service provider is really bad, and the performance management is just not up to speed.
In the short term, trying to improve the performance of the deals that are currently in place would be an excellent way for a client to go forward.
Brian Smith: I would agree with that.
I think that there are many smallish transactions that have been done - small numbers, moved either domestically or offshore - that have never truly been leveraged across organizations because they belong to one business unit or one particular function within an organization, and I think this may prompt people to realise that looking for that enterprise-level direction is something that is going to add value at this point in time, and to get more strategic in how they manage these relationships.
Tony Rawlinson: We see the value-leakage in outsourcing at the front end of the sourcing lifecycle: ie where a client's got the wrong strategy or the strategy is too distributed across business units.
So there needs to be some focus there to ensure that some of the short-termism that will inevitably be around doesn't lose sight of the need to have a sustainable target operating model.
I think the other area, as Brian covered there, is that value-leakage often is most rife around sourcing and management, so I see a continuation of the multisourcing approach.
I think there's an interest in clients to go to best-of-breed providers, but I think as more stuff is outsourced I think that that governance challenge has to be met head-on, and we need to help our clients invest in the right skills to manage these multi-provider landscapes successfully.
Tom Tunstall: One of the things from ACS' perspective that we intend to do is continue to focus on client intimacy - which to Charlie's point should help us better understand the landscape and client requirements.
The other thing we intend to do is make greater use of business process utility, delivering the same standardized process to multiple clients, our own technology and best practices; those types of approaches in the short term should allow our clients to save money and we think certainly in the near term that's going to be top of the list: minimizing investment and saving costs.
Katherine Kawamoto: One of the things that we recommend is that now is really the time to benchmark current processes, and redesign if necessary.
Certainly if you're not already outsourcing but it's something you might want to look at, it's better to have a good process that you throw over the fence, versus what we've seen in the past where people have just given whatever processes existed at the time to someone else to go and sort it out.
We are recommending that people do some self-assessments, do some benchmarking, and proceed with a little more knowledge.
Phil Fersht: All really good points here.
We spend a lot of time talking with a lot of business leaders about this and the key issue now is for providers and leading sourcing executives to sit down and work out how to create some innovation within an engagement.
Innovation doesn't just mean operationally effective; it means actually finding new ways of doing things, finding ways of bringing together things like application design with business process design more effectively, and building business-level metrics that can achieve that.
So how can you incent vendors to deliver business performance, and not penalise vendors for missing their metrics one quarter, that sort of thing.
We've seen that penalising vendors doesn't really work; there needs to be more collaboration, there need to be better ways of managing vendor relationships, and I think it's up to the intermediaries, the third parties, the consultants, the analysts of this world, to really help drive this conversation to the next level, to really help create more innovative contracts.
It doesn't help when vendors sell deals that are literally just providing bodies to the client, and the client doesn't really know how to manage them.
There needs to be a greater focus from companies on how to do this more effectively.
Look at the Big Four consulting firms; they need to build practices that are specialized in governing outsourcing contracts.
I think too many of those companies are too focused at this point on old-style business models, on shared services and things like that.
The vendors need to step up, the buyers need to step up, everybody needs to step up and start being more innovative and thoughtful about how this industry is changing and how we can design a curriculum to reflect that.
Charles Aird: One of my concerns is that our clients use consultants too much! And everybody may be appalled at that but: we find that they're too dependent on us for helping them set up the governance or the deal or the shared service environment or whatever, and then when we go away they're not able to maintain it, so more and more we're encouraging them to embed a center of excellence, or a sourcing team - call it whatever you want - into their organizations so that they can take tools and templates that come from us, or others, and then extend them through their organizations over a period of time to be able to do the deals themselves.
So that's a hope.
It may even be a dream.
Some organizations obviously have been able to carry it off very well in the world, but I think most of them are still struggling around that and, as I say, I think most organizations use consultants too much, and depend upon them too much.
Tony Rawlinson: I'd generally go with that, and I think it's got to the point now where it's incumbent on all of us to incorporate skills trends in our advice.
I think there's enough outsourcing that's going to go on for us not to be too frightened of clients growing their capabilities, and I've always been very evangelical about outsourcing only working if it's properly managed by both provider and client.
I think it's in everyone's interests at the end of the day.
Brian Smith: A client who's not doing this and does not embrace the need for them to manage is not going to succeed, and I think we need to help them understand how to embrace that.
We need collectively to evolve our way of helping them through that post-deal phase of life and we can do that in many creative ways.
(This article is a continuation of "Roundtable: Sourcing in the Face of a Financial Crisis (Part 1)", also on EzineArticles.
)
We were discussing India a minute ago, and the idea that it might benefit a little from the downturn in terms of people postponing their decisions to move out of the country.
Is it too early to pinpoint the winners in terms of locations that might come best out of the crisis? Katherine Kawamoto: I think it depends on what you're sourcing.
If you're talking about services, then I'd say whatever country has the largest talent-pool and the lowest wage inflation.
From a wage standpoint you could look at the US and claim we would be one of the better countries as far as sourcing goes.
Charles Aird: I think India has a lot of issues that may cause them even greater pain during the crisis.
I've lived in India, set up centers there, and am very acquainted with the environment there; but over the last few years the retention issues they have, the escalation in wages, and the perceived drop in quality in both IT and BPO, have caused a lot of frustrations with clients.
So I don't see clients knocking on our doors to say "let's go to India".
More and more they're looking at alternatives: China, Eastern Europe, South America, those countries that started making inroads into what India has been doing.
I think the current crisis may cause even more of that to occur.
Brian Smith: I do think however that this will maybe cause a reduction in the attrition rate in India, which will be a good thing and one that will make people feel more comfortable.
We may also see some change in the underlying economics of offshoring particularly from some of the less expensive regions within the US, and making the business case for doing this may get more difficult.
Tony Rawlinson: I think it's got to be looked at through the lens of what the requirement is, where the point of service delivery is, where the point of service receipt is, and against that backdrop EquaTerra feels that India will continue to be the dominant market for these services.
I think they're going to be helped clearly by the move we've already talked about from captive to outsourced; I think some of the weakness in the global economy is going to feed through to lower wage inflation in India which might address some of the frustration that was mentioned a minute ago.
We see China maturing but frankly not rapidly enough to be a universal service delivery response, and clearly Eastern Europe has its supporters mainly around continental European customers who take a more conservative approach to risk.
This is very much an Anglophone discussion and we're seeing the emergence of places like Morocco serving the French market, for instance, and we've talked already about Brazil serving the US market.
I think overall our view would be that India will continue to be the big player but we'd also see a "horses for courses" approach being taken by clients and a recognition that risk needs to be managed on a global basis: it doesn't make sense to have all your services running out of one country.
Phil Fersht: I can add a little additional perspective on that: let's look at the types of services that are being outsourced to different locations.
When you look at IT, I think India has developed a very strong position now delivering high-quality programming, application development services, at labor costs often a quarter of what you'd find in places like the US or UK.
I think that's just going to go from strength to strength as that model matures.
They have a real industry developing, with strong training programs and very strong footprints.
I think a broader area where it's still an open game is BPO, and when you look at the fact that you can hire BPO staff for $25-30,000 a year in rural areas of the USA, the arbitrage trade-off with India and other countries isn't that great - and if Obama takes power and gives even further tax breaks to incent countries to onshore, I do think that nations like the US - and even the UK - are still in the game.
And I think that that's going to be the area where we're going to see some change globally.
Don't rule out the Latin American countries for providing voice services and employee services and things like that.
But I think on the IT side it's almost a done deal now: I think India has cemented their footholds, they're moving into the European markets, they'll develop intelligent resources in the US and the UK and other places to service their clients.
It's more in the BPO area where we're going to see more variety, and different countries offering different unique characteristics.
Katherine Kawamoto: It seems to me that wage inflation is such a key factor in these decisions; a couple of people have mentioned Brazil, but if you look at the inflation there that seems to be on the rise - or at least is trending in an upward direction.
Globally these are really tough decisions to make because the economies themselves are so unpredictable at this point.
We really can't predict with any certainty what to predict in the way of wage increases.
As to the point about Obama: I think it will have an impact; I don't know how soon it will have an impact, however.
I'm not as certain that these things will turn around as quickly as some of the panel have indicated.
I really think this is a much longer-term issue that we're faced with.
Tom Tunstall: I think there are some things that - no matter who's in office - will preclude an easy repatriation of jobs, if you will.
With the electronic mechanisms available, some of that stuff is going to be fairly difficult, and frankly a lot of the jobs that do get outsourced are on the lower end whereas jobs created through outsourcing often are managed in the US and tend to be higher up the value-chain.
The idea that whoever happens to be in the White House will affect these things greatly is likely oversimplifying things a bit.
Global macro effects override a lot of that.
Charles Aird: I think I'd agree with that.
I'm pretty cynical about election campaigns - and we went through a lot of this same rhetoric in the last campaign; some of you may remember Lou Dobbs and all of those things.
And then we didn't see a great deal of change.
Obama will more than likely win the election - I can't imagine him not, given the way things are going these days - and I think the issues he will have to face when he becomes president are much larger than what's happening in outsourcing around the world.
Tony Rawlinson: I think it's maybe worth looking at this more holistically as well as from a service provider perspective.
The Indian players are becoming global players, the MNCs have deepened their investment in India and other low-cost economies.
I think the successful service providers are going to be able to load-balance their client requirements across multiple geographies - so actually it's probably going to be smart in many cases for clients to let the service providers take those decisions and let the economics of the deals drive where the requirements are placed.
Q: That sounds like another reason to be concerned about the future of the captive model.
Tony Rawlinson: I think so, overall - although we shouldn't be too black and white.
Yet another driver here that we need to look at - and I'm not sure I know the answer to this one - is there have been signs in recent months, until the credit crunch, of wage price arbitrage not being the only driver of offshoring.
It was increasingly coming to be seen as an acquisition of capability.
So I think potentially what we're going to see at least in the short term is a reawakening of the wage price arbitrage driver and I do think to your last point that that's going to be associated predominantly with outsourcing.
Q: OK, let's move on.
How can people in the industry best mitigate against the worst effects of the crisis in the short-term - what are the easy wins which can at least lessen the impact of what we know is going to be a pretty lengthy downturn? Charles Aird: Somebody mentioned this earlier: for a lot of clients maybe it's time to take stock of the relationships they already have, and improve their governance and performance management.
We see a lot of organizations that get through the honeymoon period - whether it's captive or whether it's a service provider relationship - and they're not getting out of the deals what they expected to get.
And quite often it is those two areas: the governance is poor, the training on both sides between the client and the service provider is really bad, and the performance management is just not up to speed.
In the short term, trying to improve the performance of the deals that are currently in place would be an excellent way for a client to go forward.
Brian Smith: I would agree with that.
I think that there are many smallish transactions that have been done - small numbers, moved either domestically or offshore - that have never truly been leveraged across organizations because they belong to one business unit or one particular function within an organization, and I think this may prompt people to realise that looking for that enterprise-level direction is something that is going to add value at this point in time, and to get more strategic in how they manage these relationships.
Tony Rawlinson: We see the value-leakage in outsourcing at the front end of the sourcing lifecycle: ie where a client's got the wrong strategy or the strategy is too distributed across business units.
So there needs to be some focus there to ensure that some of the short-termism that will inevitably be around doesn't lose sight of the need to have a sustainable target operating model.
I think the other area, as Brian covered there, is that value-leakage often is most rife around sourcing and management, so I see a continuation of the multisourcing approach.
I think there's an interest in clients to go to best-of-breed providers, but I think as more stuff is outsourced I think that that governance challenge has to be met head-on, and we need to help our clients invest in the right skills to manage these multi-provider landscapes successfully.
Tom Tunstall: One of the things from ACS' perspective that we intend to do is continue to focus on client intimacy - which to Charlie's point should help us better understand the landscape and client requirements.
The other thing we intend to do is make greater use of business process utility, delivering the same standardized process to multiple clients, our own technology and best practices; those types of approaches in the short term should allow our clients to save money and we think certainly in the near term that's going to be top of the list: minimizing investment and saving costs.
Katherine Kawamoto: One of the things that we recommend is that now is really the time to benchmark current processes, and redesign if necessary.
Certainly if you're not already outsourcing but it's something you might want to look at, it's better to have a good process that you throw over the fence, versus what we've seen in the past where people have just given whatever processes existed at the time to someone else to go and sort it out.
We are recommending that people do some self-assessments, do some benchmarking, and proceed with a little more knowledge.
Phil Fersht: All really good points here.
We spend a lot of time talking with a lot of business leaders about this and the key issue now is for providers and leading sourcing executives to sit down and work out how to create some innovation within an engagement.
Innovation doesn't just mean operationally effective; it means actually finding new ways of doing things, finding ways of bringing together things like application design with business process design more effectively, and building business-level metrics that can achieve that.
So how can you incent vendors to deliver business performance, and not penalise vendors for missing their metrics one quarter, that sort of thing.
We've seen that penalising vendors doesn't really work; there needs to be more collaboration, there need to be better ways of managing vendor relationships, and I think it's up to the intermediaries, the third parties, the consultants, the analysts of this world, to really help drive this conversation to the next level, to really help create more innovative contracts.
It doesn't help when vendors sell deals that are literally just providing bodies to the client, and the client doesn't really know how to manage them.
There needs to be a greater focus from companies on how to do this more effectively.
Look at the Big Four consulting firms; they need to build practices that are specialized in governing outsourcing contracts.
I think too many of those companies are too focused at this point on old-style business models, on shared services and things like that.
The vendors need to step up, the buyers need to step up, everybody needs to step up and start being more innovative and thoughtful about how this industry is changing and how we can design a curriculum to reflect that.
Charles Aird: One of my concerns is that our clients use consultants too much! And everybody may be appalled at that but: we find that they're too dependent on us for helping them set up the governance or the deal or the shared service environment or whatever, and then when we go away they're not able to maintain it, so more and more we're encouraging them to embed a center of excellence, or a sourcing team - call it whatever you want - into their organizations so that they can take tools and templates that come from us, or others, and then extend them through their organizations over a period of time to be able to do the deals themselves.
So that's a hope.
It may even be a dream.
Some organizations obviously have been able to carry it off very well in the world, but I think most of them are still struggling around that and, as I say, I think most organizations use consultants too much, and depend upon them too much.
Tony Rawlinson: I'd generally go with that, and I think it's got to the point now where it's incumbent on all of us to incorporate skills trends in our advice.
I think there's enough outsourcing that's going to go on for us not to be too frightened of clients growing their capabilities, and I've always been very evangelical about outsourcing only working if it's properly managed by both provider and client.
I think it's in everyone's interests at the end of the day.
Brian Smith: A client who's not doing this and does not embrace the need for them to manage is not going to succeed, and I think we need to help them understand how to embrace that.
We need collectively to evolve our way of helping them through that post-deal phase of life and we can do that in many creative ways.
(This article is a continuation of "Roundtable: Sourcing in the Face of a Financial Crisis (Part 1)", also on EzineArticles.
)
