Innovation in IT Offshoring? Impact on #BPM?
- November 18, 2009
- 5 Comments
Continuing on an economic theme within our blog, topical due to the economic challenges and BPM’s relevancy to those challenges, here’s another offering along those lines. A recent McKinsey Quarterly article discusses a new “managed services business model” that helps both customers and employees of offshore service providers. The thesis of the article is that the recession has created competitive pressures for the offshoring business that are starting to separate winners from losers. Allegedly, these new winners are focusing on the quality of services rather than on the cost-per-head, focusing on collaboration with clients, and are gaining more control over outsourcing strategies.
However, out in the field in the US, I haven’t seen this separation of wheat from chaff – I see the pressure, but the manifestation of that pressure still seems to be most clear with respect to cost discussions. Although in some cases contract language has changed to focus on deliverables rather than cost-per-head – those deliverable-based contracts are merely reinventing the wheel of the old fixed-bid-contract -putting more risk on these IT offshoring companies to deliver, or else face punitive measures from their customers. In the short term these fixed-bid strategies will likely pay off. But without a superior delivery capability, fixed-bid offerings that win on price over time-and-material offerings, tend to produce lower margins or negative margins – risk has simply been transferred from one party to the other, with no additional compensation.
Worse news, this transfer of risk hasn’t historically proven to increase the probability of successful projects. And there is no reason to think the results will be different this time.
The second thesis of the article is that the winners are developing deep talent pools that global clients demand, and developing progressive techniques to manage and retain these workers. While I’ll concede that this may be true in some areas, I have not seen evidence of this in BPM. This isn’t just my American perspective, when I’ve had informal conversations with BPM practitioners in other countries – in Europe, South America, and the Middle East – they all tell me that they can’t imagine doing BPM well without being close to the client on a regular basis. When I ask them how successful they’ve been at leveraging offshore talent the answers have not been promising. The chief complaint is the lack of understanding of business, of process, and of how to manage a project with requirements that are not set in concrete for the duration of the project.
Unfortunately media outlets and analysts routinely over-estimate the talent to be found in faraway places that can be plugged into Global or US companies’ projects, while under-estimating the talent to be found right in these companies’ backyards. It makes for good print, and there are a lot of executives who will make these points to the media. But it is a lot easier to say that you’re offshoring work because you “can’t find enough talent” than it is to say that you’re offshoring the work because “local talent is more expensive”. I’m not making a moral argument against offshoring, but I think if the discussion was more honest, some of the hype could be reduced. There is a global shortage of talent for BPM deployments and other important work in IT and process improvement. And the nature of the work doesn’t lend itself to being separated by great differences in time and space.
The part that I think McKinsey got right is that the competitive advantage of “cheaper labor” has nearly run its course as cheap skilled labor becomes more scarce, and as customers become more discriminating. Jaisundar writes a parable of this problem in The Corrosion of Competitive Advantage. After reading the narrative, Jaisundar turns to a couple of very interesting facts:
- IT has “sharpened” (increased) differences among companies rather than reducing them. And yet conventional wisdom is that technology renders differentiated products and services into commodities. The conventional wisdom is wrong because the pace of change favors those organizations that can adopt and leverage technology fastest and best.
- The competitive shakeup in the US is intense, but may only be beginning in many other economies.
There are some fantastic lessons for Indian IT service firms in this article, but many of them apply in hotly contested markets in the US as well. The key thing is that superficial changes (blue hat, anyone?) will not win the day in the long run. The competitive advantages that will win in the long run are the values and culture and skills that run deep in your organization, and the way you surface those attributes to your customers via core business processes that make up the “customer experience.”