Outsourcing today is about providing your firm oxygen to stay alive, not cost savings

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In today’s highly complex, uncertain, and difficult business environment, outsourcing might just save your business.  The whole focus on pricing and scoping outsourcing engagements is being completely rethought, as are the strategies of the leading service providers to support them. The IT and BPO services industry is reaching its most defining moment since Jack Welch doubled down on India in the 1990s…

The old 1-many outsourcing model only half works in today’s virtual environment.  In pre-pandemic days, outsourcing deals were rapidly moving away from the old “take the people” model, where the outsourcer rebadged a bunch of their clients’ staff, usually housed in service centers, and re-employed them as their own.  Adding staff to deliver fairly low-value work was treated with revulsion by Wall St – the Holy Grail was to take on new deals that required minimal labor additions to the outsourcing service provider, thus maximizing the immediate profitability of the deal. 

Automation became the antidote to this revulsion by enabling service providers to reduce labor dependency over the course of multi-year deals – however, this only works when the service provider takes ownership of the automation and has hard targets to hit to sustain delivery standards at lower costs.  Moreover, it’s proving more and more that automation rarely replaces people, it merely augments efficiencies and smooths workflows in a virtual environment.

Forget “mess-for-less”… we’re now doing “mess-for-more”.  The 1-many model worked in the past when there was a fierce determination from the client end to make a rapid transition to the existing service provider model, and a workable transition plan was set out in advance, to which both sides could commit.  However, this invariably needed a LOT of in-person sessions – at junior, mid and senior staff levels – to make possible.  Attempting to perform a fast-track transition from a messy enterprise set of processes to a standardized delivery model hosted by the service provider in today’s largely remote environment is practically impossible.  Talk to anyone attempting this and they will show you the lumps on their head and smashed laptop screens…. So forget about challenging remote-centric transitions and just move the whole lot across – people, processes, and technology (under the guise of an “asset transfer”) – and then figure it all out.  The only difference being many enterprises will be (or already are) willing to pay a premium to get to a deal.  And besides, it’s cool to have people again!

Today’s humungous people challenges and business risks actually make “taking the people” half possible.  We can go back to my very first blog (here) on BPO value in 2007, and we were droning on about moving to standard processes and new technologies back then to make BPO add value beyond the labor savings.  Fast-forward 15 years, throw in a two-year pandemic, spiraling inflation, chronic attrition, a military conflict in Europe, and a desperate need from enterprises to hurry into functioning virtual models and supply chains, and enterprises need more help than ever from third party outsourcers and their armies of millions of staff to keep their businesses moving forward. Outsourcing deals that involve talent moving to the service provider, many of whom may actually welcome their new employer, are looking a lot more appealing to many services providers in today’s environment.  

The cost to enterprises today is far greater than merely adding 10-20% onto staff salaries… it’s the massive attrition hurting the very continuity of their business operations, their customer engagement, their supply chain feasibility.  Pre-pandemic outsourcing “value” was calculated on highly tangible and legally contracted cost-savings, offset with the promise of future value from innovation.  While the benefits of innovation, how it was devised and achieved, is hard to quantify and attribute to actions and decisions taken many years in the past, you could always rely on the good old hard math to quantify whether an outsourcing engagement made sense from a financial standpoint. 

Today, the onus to outsource is far greater, for many enterprises, than merely saving on the bottom line and benefitting from greater efficiencies.  One can argue that outsourcing could keep enterprises alive if done right.  For example, if you had a team of crack cybersecurity experts and they got snapped up by Microsoft or some start-up awash with cash, you are in serious trouble… most providers are reserving their scarce cyber resources for their largest clients.  But if you have a major partnership with an outsourcing provider and your business is highly important to them, they will prioritize your needs.  If you’re a major FORTUNE 500 enterprise, you can likely rely on your major relationships with major service providers to help.  If you are a smaller client, having a large relationship with one of the mid-tier service providers could be extremely valuable as they will prioritize you, whereas the juggernaut providers will not.

Service providers that can retain, train, and develop talent to expand their skills are already becoming critical orchestrators of the business ecosystem.  We are in a war to retain people to keep our businesses functioning, and this is likely to be the case for several years to come as people reject employers who fail to develop them, pay them well, and offer them career expansion.  This is especially the case for staff working in operational roles, whether it’s part of a shared services organization, or a professional services firm.  Smart service providers are getting ahead of this with increased investments in their talent development efforts, wage increases across the board, and announcements of plans to open new service delivery centers in locations that have pools of concentrated talent that can be fast-tracked into their model.  We are also seeing several service providers target talent from community colleges and high schools, where they can offer them their own development experience that is highly relevant to their clients’ needs.

The Bottom-line:  The old math behind outsourcing decisions are dead because you just need your firm to breathe… and oxygen is priceless if it’s on offer.

Clients are quickly evaluating what talent is core to their differentiation and then determining whether they have the ability to attract, retain and develop it themselves, or whether they are better placed (and the risk lower) to partner with a service provider. 

Conversely, service providers are more hungry than ever to take on people they can integrate into their model to mitigate their own attrition risks, and cement deeper and far more strategic relationships with their key clients.  The main question now is whether the right firms are engaging with the right service providers to achieve mutual long-term success.  Those that get these new relationship decisions right to stay in the game will emerge as the leaders in their business ecosystems.

Posted in : Business Process Outsourcing (BPO), global-workforce-and-talent, IT Outsourcing / IT Services

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