Outsourcing's Shift from Arbitrage to Innovation

Ann All
Slide Show

Top Outsourcing Trends for Q1 2011

Last September I wrote a post about what I saw as two possibly contradictory trends: outsourcing clients looking for business transformation, not simple labor arbitrage, while also showing a preference for shorter outsourcing contracts. It might be unreasonable, I speculated, to expect outsourcing providers to offer much innovation under the constraints of a short-term contract.


There's another issue that may hinder outsourcing providers - and it's one they've created themselves. Their hiring and talent management programs are geared primarily toward providing ample amounts of low-cost labor. As Everest Group analyst Yugal Joshi notes in a blog post:

... While they have developed sufficient standardized processes and have very solid training programs to keep churning out "good enough" people to perform client work requiring technology competence, they cannot satisfactorily add critical business value through IT if they stick with hiring associates freshly graduated from college.

In addition, Joshi observes, focusing on acquiring entry-level workers without creating career paths for more senior employees can lead to employee frustration and attrition.


At least one provider, Wipro, appears to recognize this. As Joshi writes, Wipro is adding employee attrition and customer satisfaction to the criteria it uses to evaluate senior management - and perhaps more important, linking attrition and satisfaction metrics to managers' quarterly compensation. While these shifts will create challenges for Wipro, among them determining how to measure customer satisfaction, Joshi sees it as a step in the right direction. He writes:

... They have changed the game of IT service and they will surely attempt to do it again in higher business value services. As the low hanging client fruit is more or less taken, the next phase of growth in the cut-throat IT services market will be led by innovation and client satisfaction. And happy provider employees are the best path for these outcomes.

Of course, employee retention isn't the only challenge outsourcing providers face as they compete for higher-value business transformation projects. Clients don't always adequately convey what they hope to achieve from transformation efforts or provide the information providers need for these kinds of engagements. And a shift in management will likely be required, as traditional contracts and service-level agreements generally don't lend themselves to discussions involving innovation. As I wrote a few months ago, many companies still struggle with managing their outsourcing relationships.


I offered some good tips on moving outsourcing discussions from arbitrage to innovation in a post from 2009. Among them: Use fixed-price contracts for stable, utility-based services and a more flexible cost-incentive model that rewards vendor initiative for more transformational efforts.

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Add Comment      Leave a comment on this blog post
Jul 12, 2011 7:23 PM jack jones jack jones  says:

Employee outsourcing is a tough business to manage, one must be comfortable enough to handle the cultural/language barrier. But it is also important to be diligent and conduct some research before choosing an acceptable incentive programs are a great way of keeping employees motivated and accomplished at the same time. More companies need to look into investing into such beneficial programs.

Jul 21, 2011 1:06 PM gnaneshps gnaneshps  says:

Interesting viewpoint regarding IT Outsourcing. Just read an excellent article titled Do Your Homework Before You Select an IT Outsourcing Provider, http://bit.ly/oWigKp


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