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Published: August 28, 2006

 
 

How to Be an Outsourcing Virtuoso

As the turbulent global services industry matures, a highly skilled cadre of master providers and customers is emerging.

Illustration by Philippe Weisbecker
Not so long ago, some observers were nearly ready to declare outsourcing dead. A series of well-publicized corporate outsourcing and offshoring failures — involving Dell, Lehman Brothers, J.P. Morgan Chase, J Sainsbury, and Sears — had led to the conclusion that the future of the global business services industry was questionable. Some analysts predicted a backlash in public opinion, in which the loss of jobs in North America and Western Europe would make outsourcing politically unfeasible. Others argued that in a world of increasing political volatility and security risk, the offshoring of business services could not continue to grow.

These predictions have proven wrong.

Instead, the outsourcing industry — the international conglomeration of firms that provide services in information technology, customer care, finance, human resources, engineering, procurement, real estate and facilities management, and data analytics, among other offerings, that replace in-house selling, general, and administrative (SG&A) functions — is becoming ever more sophisticated and, for many customers, indispensable. In 2004, the International Data Corporation (IDC) valued the annual global business process outsourcing (BPO) market at $382.5 billion, a 10.8 percent jump over 2003. IDC estimates that by 2009 the market will hit $641.2 billion. Such growth — nearly 11 percent per year — is a testament to how thoroughly outsourcing is now woven into the fabric of international commerce.

This growth has also left suppliers with a variety of questions about the future of the services they provide. And for the corporate customers who contemplate introducing or expanding an outsourcing strategy, especially for those who have experimented with outsourcing unsuccessfully, a significant level of apprehension and uncertainty remains.

This dichotomy — visible but isolated failures on one side, complex but resoundingly successful outsourcing deals on the other — leads to two conclusions. First, the industry has not stabilized to the point where outsourcing any particular business activity is a guaranteed safe choice. Second, much value can be obtained from outsourcing if it’s done right, and there clearly is a right way to do it.

“Most companies that are outsourcing for the first time don’t know how to approach it,” says Ralph Szygenda, the chief information officer of the General Motors Corporation. Over the last decade, Mr. Szygenda has taken his company through three distinct and highly complicated phases of IT outsourcing that have led to $12 billion in savings and a complete technological overhaul. An evolving set of skills, not just at GM but at dozens of companies on both the supplier and the customer side, is coalescing into a body of best practices as the industry matures.

The pioneers of these practices are today’s outsourcing virtuosos. On the supply side, they’re creating instruments of unprecedented power for delivering global business performance. And on the demand side, they’re learning to play those instruments with unprecedented mastery. No individual or company has all the answers, but a clear view is emerging of how the industry should continue to meet the challenges of a fast-moving marketplace with ever more demanding customers and how companies can fashion the most effective outsourcing approach for the future. We discussed these insights with five leaders in charge of successful outsourcing programs at Procter & Gamble, Innovene (a chemicals firm), Duke Energy, General Motors, and Texas electric utility TXU, and with leaders of five prominent providers of outsourcing services: TCS, 24/7 Customer, Augmentum, Cognizant, and IBM.

The Industry Matures
To a casual observer, the outsourcing industry might well appear to share many characteristics with the dot-com economy. It is caught up in a classic boom business environment, with all the exuberance, hype, and dynamism that attend industries in the midst of wild expansion. The market appears to be going in two directions. On one hand, compelled by what appears to be expanding business opportunities, the BPO market is attracting many new firms from different segments of the IT services industry, such as software providers, data center outsourcers, and offshore application developers. On the other hand, the market has embarked on its first major wave of consolidation as the larger firms with deep pockets gobble up smaller competitors and expand their capabilities.

 
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Resources

  1. Amy Bernstein, editor, Outsourcing Thought Leaders: Managing Business without Borders (strategy+business Books 2006): In-depth interviews with the customer and provider executives quoted in this article. Click here.
  2. Anne Chung, Tim Jackson, and Tim Laseter, “Why Outsourcing Is In,” s+b, Third Quarter 2002: Strategic operations outsourcing encompasses core activities, such as manufacturing or logistics, that could substantially affect a business if not performed well. Click here.
  3. Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century (Farrar, Straus and Giroux, updated 2006): The clarion call of globalism — how lower trade barriers, reduced political resistance, and technological advances have transformed business across the world.
  4. Alex Kandybin, Martin Kihn, and Cesare R. Mainardi, “Reinventing Scale: How to Escape the Size Trap,” s+b, Second Quarter 2002: Outsourcing can be a useful tool in applying the concept of scale differently across different parts of a business to unleash real power and unlock hidden value. Click here.
  5. Bill Lakenan, Darren Boyd, and Ed Frey; “Why Cisco Fell: Outsourcing and Its Perils,” s+b, Third Quarter 2001: Warning signs from the last wave. Click here.
  6. Tim Laseter, “When Offshoring Isn’t a Sure Thing,” s+b, Fall 2004: How transportation costs, labor intensity versus capital intensity, and market responsiveness play into decisions about offshoring. Click here.
  7. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.
 
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