Will Outsourcing Clients Pay More for Benefits Beyond Labor Arbitrage?


In regard to pricing, Indian outsourcing companies are now in an uncomfortable position. They are damned if they do (lower prices) and damned if they don't.


Earlier this week, I wrote a post in which I shared portions of my recent interview with Peter Allen, TPI's managing director for Global Practices. Allen told me that North American outsourcing clients want more from their services providers than a large pool of cheap labor. "In our mind, the runway for labor arbitrage benefits is just about gone," he told me.


Yet Gartner predicts that IT outsourcing prices will plummet up to 20 percent this year and next, depending on how long the current recession lasts. Customers are pressing for price cuts and services providers will be forced to provide them to protect their business. Many Indian majors are establishing operations in countries like Mexico and Brazil, in an effort to tap into new talent pools and mitigate business risks with multiple locations. But will this really satisfy what Allen says is outsourcing clients' desire for "productivity and outcome-based measures of value?" Or is the strategy, at heart, still about labor arbitrage?


Everest Research Institute VP Katrina Menzigian told me in our recent interview that some outsourcing companies are trying to differentiate themselves in ways other than pricing, such as industry-specific offerings or process-oriented ones. In finance and accounting outsourcing, in particular, she said, "the value proposition is very much a bundling between process execution and the underlying technology."


Will customers be willing to pay more for this kind of value? That remains to be seen. I suspect clients don't want to pay any more for these "outcome-based" measures than they did for those based on getting more labor for less money. Outsourcing companies are no doubt sweating it as their margins shrink. As Menzigian suggests, the key might be offering these value-adds in a phased approach. She said:


So (outsourcing buyers) might say, "I need to accomplish these kinds of cost savings in Year One, and in Year Two I want to accomplish these other things.


Perhaps outsourcing companies also need to supplement their offerings with newer and more disruptive technologies such as software-as-a-serivce, an idea I discussed in this post from last year. I cited blogger Sramana Mitra, who suggested Indian outsourcing majors would do well to use their ample cash reserves and strong market caps to buy SaaS companies, then follow through by replacing manual processes with SaaS wherever possible. Echoing both Allen and Menzigian, Mitra wrote outsourcing companies "need to diversify their portfolios away from pure body-shopping and process competencies to technology driven advantages."