Is the IT offshoring trend we have seen over the last few decades now beginning to reverse whereby outsourcers and their customers are beginning now to opt for an ‘onshoring’ alternative?
It is true that traditional lower cost IT centres like India are no longer quite so appealing as local wages rise, but there will always be other, newer emerging economies that offer attractive labour arbitrage opportunities. However cost is only one consideration: these inexperienced new service delivery centres may struggle to provide a suitably skilled workforce, operational maturity and the levels of governance and risk management that Western markets require - which means that whatever is saved in labour cost can easily be lost in risk exposure.
The end of labour arbitrage?
Over the years industry surveys have consistently confirmed low labour cost as the prime driver for outsourcers moving services delivery to offshore centres. But with the cost differentials between the buy and supply side economies now reduced, outsourcers are now being forced to focus on building up their service portfolio so they can provide specialist expertise in everything from implementing IT governance procedures to implementing emerging technologies.
From the CIO’s point of view, the debate goes on about whether to offshore or onshore, and whether to outsource or run the IT operation or develop applications inhouse. It is worth noting here that despite the confusion, outsourcing and offshoring are not synonymous. A global outsourcer may have multinational operations and favour lower-cost centres where appropriate, but ultimately cost is only one aspect of their overall service offering. So if offshore cost advantage is becoming less attractive as a reason to outsource, what are the other issues driving the debate?
The offshoring/outsourcing debate
Politics is one. The rhetoric surrounding offshoring, particularly during election season, has notched up since the economic crisis. The story of jobs (in IT, manufacturing or anything else) lost to overseas workers has been a sore point for some time. Indeed, perhaps as a condition of its government bail-out, General Motors undertook a highly publicised “reversal of outsourcing” strategy in the US in 2009. And because of this offshoring and outsourcing conflation, the negative result of such high profile cases is that in many minds outsourcing can automatically equate to a loss of local jobs.
There are other issues as well. Since the onset of the economic crisis CIOs have become increasingly impatient with what they perceive as a lack of transparency from providers in areas like cost, mission creep and service deliverables. So does this mean that the outsourcing market is shrinking? Well, actually, no. Of the estimated $US3.6 trillion global IT spent, only 22% goes to external services providers who assume full or partial responsibility for an IT operation - a percentage that has remained roughly the same for many years.
The majority of IT funds is spent on hardware, software and IT personnel including contract staff. So, while the outsourcing budget may not be expanding, there is little evidence that it is going away. Here, then, is the question: If the offshore labour cost differential is losing its edge, why is outsourcing continuing to thrive?
Buying in talent
Clients tell us that their reason for outsourcing today owes much to the continued economic weakness which has forced them to stall projects and run extremely lean teams. But they can no longer continue to cut back and just watch and wait - the backlog of transformation programmes have grown which must now be implemented. They also see that they are suffering opportunity losses by not introducing the new technologies like customer analytics, cloud computing, virtualisation and remote collaboration, that promise to increase enterprise efficiency, provide competitive advantage and add to the bottom line.
Ironically, if global labour costs are diminishing as a compelling reason to offshore, the need for access to a broader range of essential skills is growing. Acquiring the talent required to handle many of the disruptive technologies coming on stream can be a major challenge, especially with reduced inhouse resources, so the availability of a global talent pool is one of the things that makes outsourcing an attractive option.
Aligning IT with business
Despite already running a lean operation, for most organisations in the UK doing more with less and optimising IT remains a priority A key aspect of this is choosing the right sourcing and service delivery models from traditional hosted and managed services to shared services, hybrid onshore, near-shore and offshore options and new cloud-based options. In making these choices, however, the need to reduce operating costs in the short term must be balanced against investment in risk management programmes, continuous performance improvement, IT process integration, skills development and the other operational and business practices critical to long term success. Typically some or all of this kind of expertise will need to be outsourced.
For CIOs, the emphasis today is on aligning technology with business. Sometimes the only way to get the bandwidth - or at least the most economical and speedy - is to outsource it. Not only does this introduce valuable cross industry experience and domain expertise, it adds an important string to the CIO’s bow and provides a cross-pollinating influence that can blow away established ‘group-think’ cobwebs and can challenge the status quo.
To reengineer the IT landscape in closer alignment with business strategies will likely involve the implementation of one or several new technologies and delivery models and calls for expertise in business process improvement and alignment, sensitivity to compliance requirements and very much more. In order to avoid lengthy delays and expensive experimentation, CIOs frequently turn to outsourcing to provide tried and tested platforms.
Smaller organisations that do not have the best practice IT operational procedures of larger and more mature organisations often turn to their outsourcer to provide them. A typical problem that arises from this lack of an established enterprise process framework is that inhouse IT teams and their outsourcers find themselves operating in isolation, thus building up information silos. Ensuring the type of integrated, end-to-end flow that ensures high efficiency and minimised requires things like open communication, clear SLAs, regular service delivery reviews, performance benchmarking and structured IT governance procedures - capabilities which the outsourcer should be proactive in putting in place.
We are not saying that the days of organisations outsourcing in order to achieve cost savings (either on or offshore) has come to an end - far from it, customers more than ever expect their service providers to achieve cost and performance efficiencies. But efficiencies gained by the smart application of skills and systems, not simply through cheap labour. And increasingly, CIOs are looking to their outsourcers for the kind of value added services we have touched on above, such as continuous performance optimisation, IT and business alignment, process governance and innovation: all those capabilities that go beyond the company-specific operational functions best handled inhouse. Indeed, it is within the realms of value added services that outsourcers are increasingly realising their competitive advantage. One is reminded of the adage: "They came for cost, and stayed for value"
Posted by Paul Michaels, CEO ImprovIT