I recall sitting on a panel at an outsourcing
conference in New York City back in 2004 when the major spike in offshore outsourcing kicked into gear.
There were protesters outside, demonstrating their frustration about U.S. jobs “moving offshore”. In
response, an attorney declared, “outsourcing provides a great opportunity for the U.S.—we can “offload low-value jobs and
focus on higher-value, more innovative work”. I recall thinking to myself, even then, that that
argument didn’t quite add up.
While it sounds like a nirvana, the reality is we’re competing globally for labor, for making cheaper,
better cars, for delivering good
quality IT services, for delivering quality finance, HR and supply chain support. If the U.S. is to
truly deliver “higher-value”, the government needs to invest in education programs that develop this talent.
The reality is that the rest of the world caught up. People in Chennai, Manila, Bucharest, Guatemala City,
Guangzhou, etc. are being trained to compete with American, British, French and German workers, and the
Internet and new technology have been a huge enabler to make this happen. A good friend who works
for one of the leading India-based BPOs recently suggested, “We should bring over the training leaders from
the top Indian outsourcers and have them work with U.S. businesses to get their act together”.
What continues to irk me, is that industry has become so focused on making its quarterly numbers that it
has taken its eye off the long-term picture. We saw this financial meltdown coming—and did nothing
(wasn’t the Asian crisis of the ’90s warning enough?). We are seeing further deterioration of the
environment—and still do little. We saw the U.S. automotive industry grind down to its current
predicament—and have done nothing. And we are seeing the IT and business process outsourcing industry
rapidly develop across the globe—and have blissfully ignored it to meet these cost-containment targets.
And how to we respond? Bailouts. We’re now talking about bailing out the failing automotive industry.
How did it come to this? Years of greed, a deterioration of our work-ethics, and developing nations eager
to get a taste of what we have. It’s as if we had a major cardiac arrest and are now hoping we can recover
fully from open-heart surgery.
And this time when we do recover (and we will), we simply have to make sure this never happens again.
Some will argue this is all about natural economics of globalization and a free market—and they are
probably right. However, this time we have truly reached an inflection point.
How the outsourcing landscape will change in this new economy
What is clear, is that shipping jobs offshore isn’t necessary very healthy for the rising U.S. unemployment rate.
What’s more, many offshore service providers are now
focused on taking on more high-value work activities for their clients, in addition to routine
transaction work. For example, once you have your general ledger run from a service provider in, say Chennai, what is now
stopping that provider taking on higher-value accounting services, such as budgeting/forecasting and
business intelligence? That provider basically owns and understands much of the revenue cycle
of that client, hence the natural next step is to move up the process value chain.
And if your current provider won’t move up the value-chain, there is a proliferation of KPO providers
willing and ready to take on higher-value offshore work. Moreover, while a firm may have been enjoying good
quality COBOL programming from Brazil, what’s stopping that provider offering systems architecture work for
their client, which is among the costliest onshore IT services?
The global battle for jobs is well underway
President-elect Obama has recently stated that he intends to give U.S. firms tax-breaks to source work
onshore. While he hasn’t yet outlined exactly how he plans to do this, it is likely that he initially will
provide benefits for buyers, as opposed to the providers, to source work to onshore U.S. locations.
This is the opposite strategy of the Indian government’s STPI (Software Technology Parks of India) tax
scheme, which gives tax-breaks to new Indian organizations (mainly suppliers) in the region of 10 percent to
20 percent for their first 10 years of inception, designed primarily to bolster its software industry, but
also directly applies to its service providers.
Look at it this way; you can hire staff in low-cost U.S. locations for a low as $25K a year for
back-office administrative work. If you can reduce that further, to $22K a year as a result of tax
incentives, and the cost of health-care is reduced/subsidized, the price differential with locations such as
Lat-am and India is minimal.
IT services, on the other hand, are significantly cheaper (often four-times) in locations such as India
and China for all levels of development and support services, hence a small tax-break for U.S. businesses is
not going to make a great deal of difference in the grander scheme of things.
Bottom-line: Tax- incentives can work in some BPO areas, but unlikely to impact IT
For BPO services, the U.S. is still in the game
The issues surrounding client/employee contact still favor onshore services (even though offshore
services are improving by the day), and there is still a great supply of mid-level executives who will be
anxious to keep their jobs in the forthcoming months. With significant incentives to keep work onshore, I
can see the U.S. stepping up as a serious BPO location. Not a bad thing for the BPO industry, as long as
the service providers invest wisely in attaining the right onshore/offshore balance within their delivery
Moreover, the onus on sourcing we’re going to see from the restructuring financial services industry is
going to entail a delicate balance of onshore/offshore BPO work. If the major financial services firms
struggle to sell off their Indian captives, we may well see several of them scale-down their offshore
dependence and seek onshore services as an alternative.
For IT services, it’s looking a bit late to pull much of this back
In India, for example, IT services have become the life-blood of the country’s economy, and skills in
basic programming are widely available for mainstream applications.
Even if U.S. wage rates
for programming work come down significantly, there is also a major issue with the fact that the quality of
many IT services delivered from offshore locations is now consistent.
The core battle is with services needed from business-process architects and staff with deep
industry-specific expertise. We have seen many of the leading offshore providers invest in their onshore
delivery centers over the last year—and we can expect to see continued significant competition between
the incumbents and offshore providers in the coming months for onshore-related work.
It’s about accepting that we now operate in a global economy and that we are competing at a level where
we need to work as hard, and as smart, as the next nation. I hope President-elect Obama can help instill a
new work culture in the U.S. The U.S. people want change, and they have voted in a President promising
change. The core question now is whether they are really prepared to change.
Phil Fersht is research director of Global Business
Services & Outsourcing at AMR Research.