Is outsourcing a Darwinian race to the bottom where customers relentlessly chase the lowest-price talent and outsourcing geographies to survive on thinner and thinner margins? Or can outsourcing create value through innovation, leading to growth and (hopefully) more jobs even for countries that outsource some work?
During my 18 months editing the Global Delivery Report, I’ve heard a lot about “new” outsourcing models that help customers expand into new markets and innovate with new skills. Some vendors claim regions such as India and the Latin American Nearshore don’t have to just compete on price, but can deliver complementary skills to global clients. Some analysts are even saying it’s time to ditch the word “outsourcing” altogether because it’s gotten so much bad press (especially in an election year.)
Yet outsourcing conferences always feature slides carefully comparing wage rates and currency levels in different countries, and knowing comments from outsourcing advisors that, despite what you hear, outsourcing deals are “always” about price.
Both realities are, of course, true – and sometimes for the same customer and outsourcer doing different deals or even different parts of the same deal.
As I turn the editorship of the Global Delivery Report over to veteran outsourcing journalist Ann All, the biggest lesson I’ve learned is how complex outsourcing is, and understanding the complexities is key to delivering outsourcing that helps both the buying and selling countries.
More Than Meets the Eye
A recent Everest Group chart on common site selection myths reveals some of the complexities.
One is “size equals scalability.” India, with a population of 1.3 billion, seems a more obvious choice for a delivery center that needs to grow over time than, say, Mexico with its population of 112 million. Not necessarily, says Everest. Scalability is often driven instead by specific market factors (such as the presence of colleges or local firms that groom talent) or the ability to tap talent from other industries or under-used pools such as students or part-timers.
Another myth is that “wage increases directly correspond to an increase in overall people cost.” In fact, Everest says, overall people costs often increase at a lower rate than wage increases due to increases in efficiency, or to different mixes of different skill levels. And while many assume that “high-cost and low-cost locations are in competition with each other,” Everest says “high-cost locations help optimize the overall portfolio by fulfilling unique needs.” My translation: If an expensive but excellent data analyst or app developer creates a breakthrough product or service for you, they’re more than worth the extra money.
The common lesson here is that higher-priced regions can compete and retain a price premium if – and it’s a big “if” – they develop the right skills.
Get Thee to Continuing Ed
So what are the right skills that developed, and developing, markets need to compete?
Workers in developed, more expensive markets can provide:
Services that require high levels of local language skills and cultural awareness. Beyond obvious picks such as sales and customer support, consider remote patient monitoring and follow-up. One speaker at our Nearshore Nexus conference cited “tremendous” results when a countryman rather than a foreigner checked in to make sure patients were taking their meds. In the coming era of telemedicine and aging populations, that’s a big home-field advantage.
Localized product development and marketing. Knowing that red is the color of good fortune in China, but of mourning in South Africa is kind of important in designing a website. Knowing it’s just fine, and even encouraged, to call a customer “honey” in the American South is important in delivering voice services. Knowing how fragmented the fertilizer distribution channel is in Brazil is a big leg up in developing a CRM application for it.
“Real-time” flexibility and time to market. Everything from coordinating meetings across time zones to travel increases adds cost and time. For the right projects, such as agile development, gaming or multimedia, being able to share an idea in real-time is worth the extra cost of an on-site or Nearshore expert.
Services that require intimate familiarity with existing business processes and business systems. Examples include a legacy ERP system that is too expensive to rip-and-replace, and where training an outsourcer would soak up much of the savings of outsourcing.
Workers in sell-side geographies can provide:
Commodity services for which measurement is possible and agreed on.
Specialized new capabilities that would be too difficult, take too long or cost too much for the customer to develop internally. (Think developing apps for the latest hot smartphone platform.)
New ideas or best practices the outsourcer has gained through multiple engagements with customers worldwide.
Successful global delivery providers must provide their employees:
- Decent wages and work conditions to retain the best talent.
- Exposure to world-class work habits and management disciplines to build their skills
- An on-ramp to the global delivery profession and international work opportunities.
Smart customers and providers already realize different regions have different strengths. That’s why they’re moving to global delivery models in which different tasks are apportioned among different geographies based on the skill levels required and the cultural/time zone fit, as well as their cost.
And while it sounds like common-sense, governments in every geography must do a better job educating their citizens. Fernando Fabre, the former managing director of nonprofit startup network Endeavor Mexico, told me he hears the same complaint from startups all the time: “There’s not enough human talent. What Mexico needs is a lot more of the creative class, the designers, the managers…who come up with the big change, the big idea, and then the managerial help to implement it.”
“I need more than just good salespeople in Latin America today,” Mark Stanley, Latin America director for Sony Computer Entertainment told the World Economic Forum in Mexico. “I need good digital heads who know how to develop a long-term relationship with customers as the technology keeps changing.”
That last complaint – of skill shortages among high unemployment – boggles the mind four years after the worldwide economy took a dive. It’s also another reason why outsourcing isn’t the great villain destroying developed economies or the silver bullet for developing economies. As long as companies need smart, savvy people both on-site and off, there’s opportunity for all – if they ante up with the right skills and work habits.
Dosend Ann your thoughts as this new world emerges, a process I look forward to following on the Global Delivery Report.