Outsourcing Providers Feel Squeeze, Especially in India

Ann All
Slide Show

Eight Best Practices in Supply Chain Outsourcing

Back in May I wrote about some cracks that appeared to be showing in the financial results of Indian outsourcing companies, with their margins suffering as they tried to cope with employee attrition and worked to expand their markets for more sophisticated services.


I cited an Investor's Business Daily story that quoted an Accenture executive as saying, "We proved that we can go down-market and meet [Indian outsourcing companies] at the price points they have offshore. They have yet to prove that they can come upmarket, do the big complex work and build the industry experience at scale in a global environment." I also cited my own earlier interview with Peter Allen, then partner and managing director for global practices at outsourcing advisor TPI and now president of global sales and marketing for Computer Sciences Corporation, who told me, "The runway for labor arbitrage benefits is just about gone."


In August I wrote a post in which I pointed to a survey by the Horses for Sources consulting firm and London School of Economics Outsourcing Unit. The survey found outsourcing buyers were largely happy with outsourcing's ability to reduce costs, but not so happy with its ability to improve business processes or spur innovation. (A caveat here: I'd say many companies would have to acknowledge their internal organizations also find it far easier to slash costs than to grow revenues through innovation.)


The annual offshore outsourcing survey conducted by Duke University's Center for International Business Education and Research (CIBER) and PwC seems to confirm these trends and to illustrate a dilemma for outsourcing providers trying to satisfy buyers' demands for more innovation.


According to a CIO.com story about the Duke University research, all 620 service providers surveyed reported a decline in profit margins between 2009 and 2010, but large providers saw the biggest decrease and those in India appeared to be hit particularly hard. The story quotes Arie Lewin, director of CIBER and professor of strategy and international business at Duke, as saying the growth rate of new commercial deals in India fell by some 60 percent between 2010 and 2011.


Lewin mentions the growing popularity of nearshore Latin American alternatives like Chile, which are increasingly putting government investment into developing their BPO industries.


Outsourcers appear to recognize what buyers want. When asked which factors were most important to attracting new outsourcing clients, work force skills and training (cited by 63 percent of respondents) and depth of industry knowledge (56 percent) were the top answers, while just 38 percent of the respondents mentioned low costs (and that was down from 45 percent the year before).


And they are adding more sophisticated skills to their work forces. Between 2009 and 2010, large providers bumped up the number of employees involved in analytical and knowledge services from an average of 213 full-time employees working in those areas to 1,583. During the same time period the average number of full-time employees dedicated to product design increased from 125 to 1,476, and the average number of FTEs working in research and development grew from zero to 933.


Yet many outsourcing companies continue to struggle with these more sophisticated offerings. Outsourcing clients want "total process re-engineering and optimization," Lewin says. "But very few providers can really deliver."


(To be fair to service providers, while buyers want outsourcers to help them transform their businesses, they aren't always good at clarifying what they want and they don't want to pay more for those kinds of services.)

Subscribe to our Newsletters

Sign up now and get the best business technology insights direct to your inbox.


Add Comment      Leave a comment on this blog post

Post a comment





(Maximum characters: 1200). You have 1200 characters left.




Subscribe Daily Edge Newsletters

Sign up now and get the best business technology insights direct to your inbox.

Subscribe Daily Edge Newsletters

Sign up now and get the best business technology insights direct to your inbox.