Outsourcing Suppliers, Clients Looking Beyond Labor Arbitrage

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Because I write fairly frequently on outsourcing, I was quite interested to see five predictions for the IT services market from Anirban Dutta, director of Global Strategic Business Development at IT services company CSC and co-author of "Winning Strategies: Secrets to Clinching Multimillion-Dollar Deals." I've written about a couple of these trends myself over the past few months.


Writing for Forbes, one of the trends Dutta mentions is outsourcing clients' growing desire for vertical expertise. Katrina Menzigian, a VP at Everest Research Institute, told me much the same thing when I interviewed her last spring. Though Menzigian and I discussed finance and accounting activities, and Dutta is referring to IT services, I think the trend holds true across various types of outsourcing. As Dutta puts it:

Customers expect system integrators to provide not just direct technology benefits but also help them strengthen their position in their own verticals by bringing in superior capabilities. The vertical integration among infrastructure, applications and operations will ensure efficiency, accountability and alignment between business strategies and enabling services.

Menzigian said outsourcing suppliers are using three different strategies to differentiate themselves: developing more industry-specific capabilities, offering end-to-end process-oriented solutions such as procure-to-pay processes or order-to-cash processes, and looking to satisfy clients' harder-to-define "value levers."


Dutta also predicts an increase in what he calls "New Age pricing." If you got a vision of a caftan-bedecked, crystal-wielding flute player, as I did when I first read this, put it out of your mind. What he's really talking about is outcome-oriented pricing, a trend I wrote about in December, citing my interview with TPI's Peter Allen and a Bloomberg story reporting Wipro's use of the strategy. Suppliers are taking advantage of options like cloud computing to offer their customers more predictable prices and desired results. Explains Dutta:

This simply means that service providers take full responsibility for delivering outcomes. The "how" and "where" mechanics of delivery will be controlled by the service provider to a greater degree than before.

Dutta also says India will become a much larger consumer of outsourcing services. He's certainly not the only one who thinks so. Several months ago, Surjit Chana, VP of marketing for IBM's General Business division, shared his opinion in an interview with the Press Trust of India that "India is poised to lead the second wave of IT adoption." In particular, India's numerous small companies may look to outsourcers for help as they purchase technology.


Dutta's other two trends: Service providers capitalizing on virtualization by "offering customized virtualization of computing, storage and communication for their customers, providing logical extensions to existing business process applications." And procurement organizations becoming far more involved in outsourcing decisions, which he thinks will lead to "large renegotiations of existing IT service deals with customers."


All of these trends point toward the desire of both customers and suppliers to move beyond simple labor arbitrage. But as I've wondered before, will outsourcing clients be willing to pay more for benefits beyond labor arbitrage? If suppliers can build on emerging technologies like to the cloud to improve their own cost efficiencies and offer greater benefits to customers at the same price, then customers may not need to pay more.