Phil Fersht (HfS): You’ve spent a good part of your career in the outsourcing business yourself. What inspired you to coin the headline and write a paper entitled the “Death of Outsourcing”?
Cliff Justice (KPMG): Outsourcing has changed dramatically in the last five years. When we saw the megadeal declining, we started asking why. The answer: Companies had become more sophisticated in how they deployed their third-party service provider relationships. When companies were outsourcing everything, they just moved out large parts of their organization, handing them over to third parties to operate. Some of those were successful and achieved the goal, which was pure cost reduction. Labor arbitrage became truly feasible and economical when markets like India became a prime outsourcing destination with the acceptance of offshoring around 2001.
Phil: What changed?
Cliff: Over time, companies realized that the value they can gain from using a service provider extends beyond just labor cost reduction. By offshoring you get a lot more than labor arbitrage. You get good talent and providers with advanced processes that would have been difficult to source domestically under a traditional structure.
Phil: How has the rising cost in emerging markets affected this equation?
Cliff: Today, there is still labor arbitrage. But year-over-year wage inflation of 10-15 percent has started to have a material impact on the business case. There will be a day when we reach an equilibrium. I don’t know if that will be five or 15 years from now. Companies have to start looking at how they get the long-term value out of their service delivery organization. Is labor arbitrage going to be the sustainable answer?
Phil: What are your clients doing?
Cliff: Many of our clients see it as unsustainable. They are now looking at their services more holistically. They look at their suppliers in a different way, too, not just as a means to lift and shift resources but as a means to add value to their businesses. We work with hundreds of leading organizations and we also work closely with service providers.
Phil: So what part of outsourcing is dead?
Cliff: The traditional perception that outsourcing is purely about offshore labor arbitrage, or simply a race to the bottom. The death of outsourcing as I define it is the death of the simple, traditional, lift and shift offshore outsourcing. That is still going on and there is still a part of the outsourcing community where that is their value proposition. But we’re seeing a major shift in how the entire service delivery model is deployed which is much broader and delivers more value
Phil: How are companies using outsourcing providers instead?
Cliff: Companies are using third parties in a more sophisticated way to drive value. Outsourcing is now shifting to a race to improve value through the use of third parties. Now labor arbitrage is just a part of that. Enterprises are still interested in reducing cost. But now they are looking for cost reduction through other mechanisms such as technology enablement through the cloud (which they do through a third party). They are also using their own captives and shared services capabilities, then augmenting those capabilities with third parties to improve processes.
Phil: In this brave new outsourcing world, what do the relationships look like?
Cliff: They are beginning to look more and more like true partnerships where both parties share objectives. The service providers win because they are developing depth and breadth in an industry. They are strengthening their long-term relationships and moving up the value chain into business outcome objectives with their clients. They are entering areas of the business that can move stock prices and improve the value of that organization. In the same instance, they are improving their own value.
You can see this by looking at where service providers are moving in their clients’ organizations. Look where their focus is. You can see the satisfaction of the clients themselves. We’re fortunate to see a wide range of these relationships. The way to get true, long-term sustainable value is getting the partnership to align with the business objectives. Labor arbitrage by definition is temporary, so the unsustainable relationships are those that are in the traditional category of “your mess for less.”
Stay tuned for Part III where Cliff shares his views on whether we should drop the “O” Word, among other things…
Cliff Justice (pictured above) is Partner and U.S. Leader, Shared Services and Outsourcing Advisory at KPMG LLP.
(Cross-posted @ Horses for Sources)