Outsourcing coming of age
September 4, 2009
According to a recent Ernst and Young report, “Taking Wings: Coming of Age of the Indian Pharmaceutical Outsourcing Industry,” global pharmaceutical and biotechnology industries have NOT yet managed to take full advantage of India’s strong chemistry capabilities, skilled manpower or cost-value proposition.
Misled by the country’s “branded-generic market image,” they haven’t come to a stage, where they can trust to outsource some of their core functions, namely drug discovery and research. Consequently, a bulk of the work being outsourced to the country relates to clinical trials or lab testing and writing that does not take full advantage of the Indian pharma and medical capabilities.
Nearly, the same scenario persists in IT, KPO, HRO and LPO sectors.
This is a trifle sad, as the old economy has shown that the outsourcing model can be successfully leveraged across both core and non-core activities. Take for instance the case of, Nike, Reebok and Adidas. These shoe manufacturers have steadily been whittling away their core manufacturing processes to Asia Pacific countries.
“Today, it [Nike] is little more than a trademark and a distribution network, as it has contracted all of its capabilities to outsourcers,” remarks one keen observer of the company stratagem.
Nike’s case in fact shows that except for strategic planning, a brand can virtually outsourcing any activity and survive by intelligent sourcing and pricing strategy. Nike today controls 47% of the US footwear market through 500 000 Asian employees. A bulk of Nike’s shoes are being churned out of low-cost bases in China, Indonesia and Vietnam, besides, Italy, the Philippines, Taiwan and South Korea. And in nearly 100% of the case, the work has been farmed out to subcontractors, i.e., third party negotiators in IT parlance.
Nearly the same trend can be spotted in the finance and accounting sector as well. “There is an investment bank which recently outsourced its quant department, and as you know that is one of the key things in an investment bank and they have outsourced it,” Faraz Khan, a McKinsey analyst, recently confessed to Network World.
By 2010, Khan predicts a lot of core finance and accounting activities will be outsourced, especially operations related to mortgages, treasuries and actuarial practice, all of which are, arguably core functions in the financial sector.
Thus, the view that high-end work must necessarily stay in-house is outdated. This whole debate about core and non-core is a little out of context now, when you begin to analyze the breadth and depth of activities that are currently being outsourced to low-cost destination, not just to cut cost, but, also in some case, for quality improvements and for the simple fact that this kind of talent may simply not be available at home!
John Lutz, general manager of IBM’s managed business process services in an interview to Forbes said that both in IT and on the process side, IBM is trying to figure out what are the task that hey can execute themselves, whether they are core or not and in some cases, just because of scale or expertise, the company considers it worthwhile to assign the task to a professional who can render a better job.