Why is it always the Americans at the head of the queue when it comes to increasing quarterly profit margins? But, even more intriguingly, why are they also leading the way when it comes to attempting to improve their capabilities when they outsource? Our recent State of Outsourcing Study 2013, conducted with the support of KPMG, clearly shows the differing mission-critical business motivations across the main three global regions, when it comes to ITO/BPO:
So, in our true style of insulting everyone from every continent with sweeping generalizations, let’s take a closer look:
North American Enterprises:
Simply put, these firms are a lot more experienced with outsourcing IT and business processes, and a good proportion of them are today showing a good deal of maturity as a result. Much of this is because outsourcing has traditionally been a game for the large corporates to play… and most of the large corporates are based Stateside. Moreover, the biggest “lever” of attractiveness over the last 10+ years has been wage arbitrage to India, hence it is those English-speaking enterprises with the most to save, who are the prime candidates to benefit financially in the short-medium term. This also explains why the UK, then Australia are the second and third most mature countries, respectively, for ITO/BPO.
What’s most interesting here, is the fact that cost-reduction is no longer the main dominant factor behind outsourcing for American firms – effectiveness measures, such as process standardization and re-engineering, are nearly as important, but, most encouragingly, high-value capabilities, such as improving analytics, accessing new technology and talent – and proven provider offerings, are mentioned as mission critical business drivers by a quarter of North American firms.
Simply put, many organizational leaders are waking up to the realization they are running out of wiggle-room in terms of finding massive cost savings simply from labor arbitrage, and the only long-term measures to find new thresholds of productivity is through smarter process redesign (and standardization in areas where there is limited competitive advantage to be had), a more analytical workforce that can help the firm make faster and smarter decisions, and a more flexible operations infrastructure that can scale to the needs of the business. What’s more, our research shows many of the larger enterprises viewing outsourcing a part of a broader framework for achieving business objectives, alongside internal business functions, shared services and offshore captives. It’s being viewed less and less as a siloed strategy for cost reduction, and more as one lever of many for achieving better productivity, tighter operational control and access to external resources and acumen.
Moreover, an encouraging economic period traditionally drives North American firms to evaluate more radical opportunities, and outsourcing frequently rises to the surface as a genuine change-agent during times of economic stability.
Cost-reduction and standard delivery requirements still dominate most European firms, with the exception of a handful of enterprises in the UK. Simply put, many of the large-scale European enterprises are far less experienced when it comes to outsourcing and offshoring as their North American counterparts, and many offer a less mature, “just get it done” attitude. The majority do not really want to change, and do not feel the need to transform processes or improve their analytical capabilities – or even if they did, they certainly do not view an outsourcing relationship as an opportunity to do a lot more than drive down some costs, standardize some processes and get some better flex into their operating model.
Interestingly, there does seem to be a notable increase of Euro firms viewing outsourcing as an opportunity to access some quality talent (21% state this as a mission critical driver), which is surely a result of the shortfall of affordable quality IT talent available on the European continent and the proven success of the ITO model for many global organizations today.
Couple all of this with a horribly nervous European economic outlook and you quickly get the picture why outsourcing just isn’t everyone’s cup of tea these days. Why rock the boat even more, when everyone’s already seasick?
It’s difficult not to sweepingly-generalize when you have the likes of Japan lumped in with Malaysia, India, China and New Zealand, but the underlying trend here, is that many firms view outsourcing as a real chance to improve their processes, and globalize their operations. They are less enticed by cost-reduction – and this is often because low cost labor is already available locally, in addition to the fact many AP firms are scattered across the region without massive repositories of centralized staff do to a cost-slashing “lift and shift”.
It’s clear many AP firms see outsourcing as a quick route to get from “A to C” with some areas of the business that could really benefit from a more standard solution, such as payroll, procure-to-pay or ERP maintenance. However, what’s also clear is these organizations are miles away from recognizing real strategic value from outsourcing, with only one-in-every-seven organizations viewing outsourcing as a key driver for improving access to new talent and analytical capabilities.
So these immature adopters are viewing the tactical benefits first and foremost. Perhaps that will change in a few short years as uptake of global sourcing models picks up… but it’s still very early days for this region.
The Bottom-line: Tactical measures continue to dominate, but ambitious North American buyers are starting to lead the way with a more progressive approach to outsourcing
We can bemoan the old “outsourcing is all about cost and meeting green lights” adage, but there are some genuine positive signs that our weary operational warriors are beginning to take a more progressive approach to outsourcing these days.
The fact a quarter of North American buyers now view analytics, talent, improved technology and provider maturity as mission critical shows that a portion of this industry is finally beginning to move the needle to achieving more than the basics. Smart governance leads realize they need to build careers from managing outsourcing engagements, and if they simply sit back and check boxes on spreadsheets, their own employability with soon come into question.
What’s more, shared services has struggled similarly to achieve higher level value – and over a longer period than outsourcing – and there is a genuine coming-together of operational governance models, with the likes of Global Business Services being tested as the future operating model. Are we at an inflection point? Yes, I believe so… albeit very “gradual” one!
Disclaimer: before you non-Americans go piling in, the author of this article, Phil Fersht, is actually a British subject currently living Stateside