{"id":1429,"date":"2011-12-13T18:13:00","date_gmt":"2011-12-13T18:13:00","guid":{"rendered":"http:\/\/localhost\/projects\/horsesforsources\/house-of-cards_121311\/"},"modified":"2011-12-13T18:13:00","modified_gmt":"2011-12-13T18:13:00","slug":"house-of-cards_121311","status":"publish","type":"post","link":"https:\/\/www.horsesforsources.com\/house-of-cards_121311\/","title":{"rendered":"@The_Whole_Outsourcing_Industry: Labor arbitrage built your house of cards. #Bubble What\u2019s next?"},"content":{"rendered":"

The outsourcing industry is a labor arbitrage bubble waiting to burst.\u00a0 And today\u2019s smartest buyers and service providers are poised to fatally pop it and build a better future.<\/strong><\/p>\n

We know that buyers were accomplices in the run up. After failing to invest in their operations, buyers saw limited value in their business functions.\u00a0 Accounts payable teams were overwhelmed with paper, finance teams struggled with creating process rigor, and human resources teams bungled global resource management.<\/p>\n

\"\"<\/p>\n

Struggling with recent macroeconomic issues, buyers simply didn\u2019t have the time or resources to reengineer for greater value.\u00a0 So, they threw in the towel and asked service providers to manage their processes for them at a lower cost. \u00a0To them, reducing the monetary size of their cost centers was success.<\/p>\n

IT was no different and they were the biggest buyers of expensive labor.\u00a0 Their internal customers furiously revolted against swelling technology wai$tline$ and the lack of an \u201capplication development factory\u201d mentality. \u00a0So, in the midst of economic haircuts, CIOs surrendered by outsourcing their staff to offshore companies that brought CMM and ITIL process rigor.\u00a0 Yet, these efforts did little to simplify underlying application and infrastructure platforms that drove their high costs.<\/p>\n

Have no doubt – labor arbitrage provided everyone immense value.\u00a0 Yet, at its best, labor arbitrage is a funding mechanism for true best practice adoption.\u00a0 At its worst, it is a circus sideshow absorbing management focus. \u00a0\u00a0And we know that most buyers adopted to lift and shift, rather than rushing to adopt best practices at the outset of their deals\u2026<\/p>\n

Never before has the future of our industry been more clear: Today\u2019s wiser buyers\u00a0know<\/em>\u00a0that the value of accounts payable, procurement, or customer service shouldn\u2019t be equated to its cost per invoice, PO, or call.\u00a0 They want\u00a0value<\/em>.\u00a0 Accounts payable should improve working capital and enforce contract compliance.\u00a0 Procurement should generate hard savings and source best in class suppliers.\u00a0 Customer service should eliminate the sources of customer frustration and create loyal relationships.<\/p>\n

Still, the road to our future is unclear. \u00a0As buyers begin to line up for higher value services, their shift in demand will dramatically affect the marketplace.\u00a0 Service providers that cannot develop IT-enabled BPO platforms, provide insightful analytics, or drive high value business outcomes will lose market share and be relegated to second tier \u201ctactical\u201d supplier status. \u00a0Service providers that can help extract greater value will dominate and their customers will benefit.\u00a0\u00a0 Billions of dollars are on the line and buyers need to make bold decisions \u2013 many of which involve justifying switching costs of changing service providers on improved business outcomes.<\/p>\n

The Bottom-line: Today\u2019s Buyers Face Three Challenges<\/span><\/p>\n

1) The foremost challenge facing buyers is the\u00a0immaturity of service providers to provide more than labor arbitrage<\/strong>.\u00a0 In every segment of the outsourcing marketplace, leading service providers are urgently developing solutions. \u00a0Like Accenture\u2019s acquisition of Duck Creek to provide value to property and casualty technology.\u00a0 Or IBM\u2019s development of Watson and its application in the healthcare industry.\u00a0 Or Genpact\u2019s acquisition of Akritiv to support account receivable departments.\u00a0\u00a0 Surprisingly, most service providers are non-committal and prefer \u201cdating\u201d through arms length partnerships, but their maze of third party partnerships are hard for buyers to understand.\u00a0 Other service providers are hesitant to invest at all and instead try to talk their customers into co-investing in developing improved capabilities<\/p>\n

2) The second challenge facing buyers is\u00a0determining a fair fee structure<\/strong>\u00a0of a value-based arrangement.\u00a0 Because buyers have a mindset and past experience based on FTE-based economics, they find it difficult to compensate service providers for the value they will create.\u00a0 Especially when comparing a value-based bid to lower cost labor arbitrage-based bids.\u00a0 Buyers are notoriously cheap.\u00a0 Buyers figure they can start \u201cphase 1\u201d with a low cost FTE-based structure, but rely on the service provider\u2019s unplanned \u201cinnovations\u201d that may provide more value.\u00a0 But they are unlikely to be satisfied with the results.\u00a0 The foundation of any outsourcing relationship should be making changes that maximize a process\u2019s business value.\u00a0 Service providers who create better outcomes should be entitled to better margins, which buyers should be willing to pay \u2013 if the outcomes are assured and proven.<\/p>\n

\"Tony<\/a><\/p>\n

Tony Filippone is Executive VP for Research (click for bio)<\/p>\n<\/div>\n

3) The third challenge facing buyers is\u00a0managing transitions to new service providers<\/strong>\u00a0that can provide value.\u00a0 If their business cases are not sound, internal pundits will hamper transitions and long-term value.\u00a0 Risk adverse buyers with limited experience with switching service providers will need to manage large transition efforts. Most importantly of all, if buyers fail to establish the right governance leadership, they will fail to achieve their ultimate goals.<\/p>\n

Much of what lies ahead is unclear.\u00a0 As the economist Adam Smith said, \u201cOn the road from the City of Skepticism, I had to pass through the Valley of Ambiguity.\u201d\u00a0 To this end, HfS Research will continue its aggressive research agenda focused on providing unbridled, industry-leading research to organizations seeking improved clarity.<\/p>\n

Tony Filippone is EVP, Research at HfS Research. \u00a0He can be reached at tony dot filippone @hfsresearch.com<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

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