The great outsourcing talent-chasm: 57% of service provider staff don’t understand their clients’ businesses

Rarely has a debate aroused so many emotions, yet failed to reach any conclusions, which was precisely what transpired when 900 of us duked it out over whether to drop the term “Outsourcing”.  However we view this debate, outsourcing is centered predominantly on one constant:  talent.  

Talent costs money and brings capability.  Outsourcing is about helping enterprises get better capability without increasing costs.  It’s about tinkering with enterprises’ talent bases to deliver improved services without increasing costs.  So how – pray tell – can enterprises improve their talent without going through the considerable expense of hiring new people and training their existing staff?  The answer is simple: find someone else to help you do it – and good luck with it!

Of course, better workflow and process, better quality and innovation are vital ingredients to achieve greater productivity and increased revenues, but you have to start with the most critical ingredient:  your talent.

If the industry known as outsourcing can prove consistently over time it can improve clients’ access to talent and new capabilities without increasing costs, then we won’t call it “outsourcing” any more, we’ll just call it “IT”, or “Finance”, or “Insurance” (and so on) services.  However, when the central component of the industry is to swap out local staff with foreign staff, the first question the general public (92% of whom – in the US – are actually employees) will ask is “Can these people do IT, finance or insurance better than we can”.

Fortunately, HfS has been able to reach out to close to 700 key stakeholders in the industry, 215 of whom are from predominantly large-sized US corporations, where we were able to ask them how they rated the attributes of their local talent to the overseas talent being provided by their service provider:

Where outsourcing is performing well

In terms of work ethic, process competency and overall value for money, service providers’ non-US staff are matching the local staff.  If these staff are 30-50% cheaper, that’s a pretty good return on your investment if that’s all you really care about.

Where outsourcing needs to close the gaps

In terms of business understanding, initiative, innovation and culture, the non-US staff being provisioned are miles behind local staff.  For example, only 43% of buyers feel their non-US staff understands their business, when compared to 88% of local staff.  Yes, this gap will surely close as the industry matures, but I find this talent-chasm unacceptable in today’s global marketplace.

The Final Word: Service providers need to improve their talent mix and use more local talent, however, buyers need to demand it

Outsourcing has earned a largely crappy reputation because it’s become so focused on providing rules-based models that can enable offshore staff to get the job done.  Many clients, for whatever reason, have been convinced they can do this with 90% of their delivery staff sitting offshore, or some simply didn’t care and wanted to make the numbers work.

However, our research clearly tells us that most clients care passionately about innovation and process improvement, so why are we persisting with these imbalanced delivery models, where the outcomes are performing miles from what we want to be?  Why aren’t today’s buyers training their own staff to manage their global resources more effectively, so that more of them do understand their businesses?  Why are service providers so insistent on sending offshore managers onto their clients’ sites to manage their own staff, when they should be training their clients to be more self-sufficient?

I believe this industry has become skewed – too much work has been shifted to offshore locations, when their needs to be greater investment in improving local talent.  Providers need to be more global with their focus and provide more balanced location options for their clients, even though clients will have to pay more for it.  A more balanced onshore/offshore mix will lead to better development of offshore personnel and help bridge the current talent-chasm that is plaguing today’s outsourcing industry.

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9 Comments

  1. Alan Christopher
    Posted October 2, 2012 at 7:43 am | Permalink

    “Outsourcing is about helping enterprises get better capability without increasing costs”. There lies the catch-22!

    The core issue here is the level of cost-savings clients intend to make when they sign their first contract – if they opt to maximize cost reduction purely through labor arbitrage what do they expect, having people thousands of miles away trying to interpret their processes?

    Alan Christopher

  2. Steve Hedges
    Posted October 2, 2012 at 7:50 am | Permalink

    Phil,

    A sharp analysis – well done. I find it interesting that US and non-US staff score pretty much the same for “value for money”. Doesn’t that tell us clients feel the cost-savings were worth it?

    Steve Hedges

  3. Phil Fersht
    Posted October 2, 2012 at 8:19 am | Permalink

    @Steve – I think it tels us that clients feel like they get what they pay for. I am not reading anything overly-negative into this data regarding overall performance and expectations being met, more the drop off of business alignment we see, when work is moved out of the country… PF

  4. Warren McDonald
    Posted October 2, 2012 at 8:47 am | Permalink

    Great blog post – very insightful.

    The next question to ask should be “Do you care whether your provider understands your business?”

    For some processes, you just want a job done efficiently – it’s about outputs, not consultative interaction,

    Warren McDonald

  5. Posted October 2, 2012 at 1:59 pm | Permalink

    Phil,

    One thing I would add in there is an angle about being a “good client”. Our best client relationships are when we include our people in their teams, where the leadership (from our team and the client’s team) regularly visits the delivery centers. Our best clients really invest energy into making sure our people “get” their culture and are connected to them as a client – versus the old “master slave” model. We really make the extra effort to seek out these closer relationships with our clients during the pursuit process,

    Sarah T.

  6. schuyler kennedy
    Posted October 2, 2012 at 2:18 pm | Permalink

    I glean from this that it all boils down to a single word: output. Is that all we care about? Overal, the benefits of outsourcing won’t withstand a closer examination. Pure output was the same tact that the U.S. military eventually took in the Viet Nam War. They called it, “Body Count.” It lead to falsely trumped up statistics, ineffective utilization of resources, and poor effeciencies of scale. The above statistics demonstrate that the outsourced workforce doesn’t understand the language and the culture, doesn’t take initiative, aren’t innovative, and are overly process driven, when compared to organic elements stateside. Basically they have no skin in the game. To use a military analogy: would you want foreign attachment to a national battalion, in a battle, that employed the above mentioned undesirable characteristics? On top of all this, the U.S. based corporation needs to offset its savings by having its managers on the ground in the foreign country in order to properly manage the surrogate workforce, further tying up resources that could be better used elsewhere. Outourcing makes sense in some instances (where you essentially want to have humans answer the phone instead of robots) but I’d invite the U.S. to work within its means at home.

  7. Phil Fersht
    Posted October 2, 2012 at 2:26 pm | Permalink

    @Sarah – I definitely agree that there are “good clients” and those who only care about metrics (what you rightly call the “master/slave” model). Bottom-line, we need clients who actually “care” about whether their provider understands them. We are definitely reaching a bifurcation point where some relationships are thriving, due to real cultural and team-driven collaboration, while others are becoming increasingly unproductive, depressing affairs where the client only cares about meeting metrics and applying penalties wherever possible. Those are places today’s ambitious businesses and providers should never wish to find themselves…

    PF

  8. andrew lehman
    Posted October 2, 2012 at 2:36 pm | Permalink

    I agree that the direction and focus should be towards simply being able to do the job better than the customer can do it in-house. This is something the service providers should be able to do since this is their business’ primary focus, where your customers’ primary focus should be on doing whatever it is that they do, say building widgets. If the service provider is better at providing this IT service, they should be able to provide a superior service at a better price, than the company can achieve using in-house staff. This is what’s beginning to happen all over IT today.

  9. Posted October 3, 2012 at 11:00 am | Permalink

    Thanks for the great webinar … thoroughly enjoyed the discussion.

    Two attributes stood out strongly for me during the webinar …
    1. ‘Understands their business’ — The questions is whether the understanding is around how transactions are done or is it around how value gets created — talent gap also may reside with clients — if the existing talent knew how to create value — they would have already captured it or with the offshore-based transaction processing off their plate — they would have embarked on value creation. Hence tenure may not necessarily translate to talent for innovation or transformation but may reflect on nuances of running the business.

    2. ‘A more balanced onshore/offshore mix’ — This may not solve for the value and talent gap — currently process designs usually have a L1 (offshore) and L2 (client) staff — but they operate in silos and focus on transaction level details. The reality of value is that processes get managed vertically but value gets created horizontally. If the client manager or director who led payables continues to lead the process with a mix of onshore and offshore — not a lot would change in terms of value creation. But if the client and the service provider take a value chain view and designate value chain leader responsible and accountable for transformation and value creation then they can cut across silos — in a S2P chain for example … sourcing – supplier admin – procurement – payables – treasury and even right till fixed assets and general accounting can be seen end to end to drive value.

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