Current trends in offshore outsourcing
January 13, 2010
US financial crisis that started in 2008 changed several industries permanently; offshore outsourcing is not immune to the changes. Top outsource vendors successfully managed the global recession by adopting different global delivery models and by understanding customer’s business started providing direct business value in the projects. Customers from their part started managing their outsource vendors more efficiently and with better performance metrics they started getting maximum benefits in minimum cost.
Following are some of trends that are happening in offshore outsourcing.
1. Outsource vendor delivery model
Outsource vendors started with “Staff Augmentation” as the primary delivery model slowly changing to “Managed delivery model”. In staff augmentation, client sends RFP to offshore vendors asking for specific technical skills like Java, C++, Oracle DBA, etc. Outsource vendors respond to the RFP by sending their employee’s resume with an hourly rate. Generally outsource vendor with lowest hourly rate (cost arbitrage) wins the RFP. In this model customers did not have a way to find the business value provided by the contractors. “Yes” the customers saved money in their projects, but they do not have a way to specifically point out the business value added by those contractors. Also customer’s measurement did not include the time spent (and productivity lost) by their own employees in managing and training the contractors.
2. From cost arbitrage to managed delivery
The cost arbitrage model gave little or no incentives for the outsource vendors in providing other business values like quality, process efficiency, time to market, etc. In the managed delivery model outsource suppliers agree to deliver specific functionality for a given price. For example, customers outsource their call center operations with specific service level requirements like call wait time less than one minute per customer, number of calls processed in a given time etc. In the managed delivery model both client and the outsource supplier work closely from the beginning of the project, often client considers the outsource provider as a partner and gave full control in managing their own employees. Customers benefit from getting the desired services without managing the variable requirements of the contract resources needed for the projects.
The new managed delivery model is getting wider acceptance in both onshore and offshore outsource projects. Compared to cost arbitrage model, in managed delivery model clients must spend significant up-front cost in working with the outsource vendor’s team in making them understand their business processes, IT infrastructure, project management, etc. So they may not see the ROI for a long time, but still customers are moving towards managed delivery model due to the benefits offered by the new model.
3. Different pricing models
In the managed delivery model customers started negotiating different pricing models like fixed price, transaction based, performance based, etc. For customers these new pricing models are helping to reduce their capital (capex) and operational expenses (opex). For offshore vendors it is helping to use their resources efficiently to achieve the SLA set in the outsource contract and to meet their profit margins.
4. Outsource vendor domain maturity
In the managed delivery model offshore vendors moved from lower to higher value chain, working closely with the customers, started offering business solutions that are strategic in nature. This is helping the customers to identify long-term need for the offshore vendor services and managing the project more efficiently. The offshore vendors are benefiting repeat business from their customers and it also helping them to sell their domain expertise to other customers in similar business verticals.
5. Outsource project metrics and accountability
Traditionally offshore outsourcing performance metrics was performed with the main focus on cost savings. But now in the managed outsource model, customers started measuring business value provided by the offshore teams. Typically both the client and the offshore vendor identify minimum number of measurable goals in the beginning of the project, add those goals in the SLA, and manage it throughout the duration of the project. This gives the client and the offshore vendor a proper project governance in resolving issues that arises during the course of the project. The transparency provided by the new model is helping the offshore vendors to correct their mistakes and offer better service to their customers.
In the post-recession world, both ITO and BPO changed for good, offshore vendors have to mange constant pressure to lower their cost and provide higher value services to their customers. This forced the offshore vendors to change their delivery model by utilizing highly skilled onshore and offshore teams to provide higher value to their clients. By seeing the success of India, other countries like China, Philippians, Mexico, etc., started competing for the outsource projects. This is creating increase in competition, decrease in price for the offshore vendors and ultimately benefiting the customers.