By Robert L. Scheier
During our recent visit to Guadalajara, Ankur Prakash, Vice President and COO of Tata Consultancy Services Latin America, used the “B” word with us: Bubble. As in a “Nearshore” bubble, in which unqualified service providers set up shop in Latin America to ride the wave of demand generated by first tier players. While they can offer the same Nearshore benefits (physical and cultural proximity to North America, passionate, creative work force) as vendors who are in LatAm for the long haul, they’ll damage the industry’s credibility with shoddy quality and poor treatment of workers.
The top-tier vendors in any market of course have a vested interest in preserving their image (and the price premium they can charge) over their “no-name” competitors. But after the massive damage the housing bubbles continue to inflict on the global economy, talk of a similar “bubble” in Nearshore outsourcing raises the jitter factor.
Are we building to a damaging over-expansion and collapse of the market? Let’s take it piece by piece.
- Excessive growth in demand beyond what natural market forces can support long-term.
- Excessive rise in prices which lures buyers into debt unsupportable by the long-term value of the underlying assets.
- Lower-quality or unscrupulous providers flooding the market with low-quality, low-cost goods and services, selling their stake or moving on before customers realize what they bought.
- As the bubble crashes, a sharp and sudden decline in demand and prices. Customers are left with sharply devalued assets, and the entire industry suffers a black eye which depresses demand long-term.
In the outsourcing market, of course, few if any physical assets are created or change hands. There are no tracts of abandoned townhouses lining the interstate (though we can imagine a lot of empty call centers). The “asset” whose value can balloon and then collapse beyond any link to reality is the long-lasting knowledge and skills of the service provider, and the transitory, day to day services (whether data entry or remote infrastructure services) it provides.
Where the analogy holds up best is, first, in the damage that can be done to customers. Too many lack a good enough understanding of their own processes and costs to structure an effective deal with an outsourcer. Too many are so short-staffed or under so much pressure to cut costs (else, why outsource?) that they can’t take the time to manage an outsourcer properly. That’s an open invitation for unscrupulous providers to underbid, underdeliver and flee the market before the proverbial chickens come home to roost. That would hurt the industry’s reputation, and drive many honest, hard-working people out of jobs they hoped would lead to a stable career.
Unfortunately for customers, dumping a distressed outsourcer is even harder than dumping an underwater mortgage. If a service provider performs even part of their work well, the customer quickly comes to depend on them. Finding a replacement, and training them on the customer’s needs, hijacks time the customer could instead be spending improving their own business. The larger the company, and the more complicated the engagement, the greater the risk.
The final similarity: Just as a mortgage might be sold to a group of investors the homeowner never meets, business process or IT outsourcing today is often provided by multiple delivery centers in multiple geographies. Its efficient and effective when done right, but maddingly difficult to track and streamline if done poorly or dishonestly.
Before we have an outsourcing bubble, though, we need the trigger of excessive demand driven by a perception that the “best geographies” or the “best people” are being rapidly snapped up and that customer better buy before prices rise. Are we there yet? Let us know how the bubble looks from where you’re standing.