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 / Autumn 2006 / Issue 44(originally published by Booz & Company)


How to Be an Outsourcing Virtuoso

In this environment, pure-play process providers are finding it difficult to compete against established market leaders without an expanded offering and a world-class technology platform. Other firms with a limited number of BPO contracts are discovering that subscale operations cannot deliver the value necessary to grow their businesses. Several of these firms are dropping out of the BPO market or merging with larger firms that have the resources to compete. Service standards are still emerging and pricing models still evolving; legal protections are inconsistent, and the roster of providers and offerings is always shifting. Hence the woes that many client companies have experienced with outsourcing.

But amid the ferment, several trends are shaping the offerings of the most successful providers:

• An Expanding Global Footprint. The marketplace for outsourcing is far more varied than it was a few years ago, with competitors of all sizes operating primarily from India, China, and the Philippines and offering their wares to customers around the world. Like their clients, they are spreading globally to make the most of international diversity, balancing the capabilities, language capacity, cultural affinities, and cost structures of a variety of regions. The more forward-looking suppliers include Western behemoths like IBM, which recently announced its intent to triple its investment in India to $6 billion over the next three years. They also include Indian providers such as TCS, which has offices in 34 countries on six continents, and 24/7, which is scaling up a center for global services based in the Philippines. With the leading players globalizing their operations, some distinctions between “Western” and “offshore” vendors are starting to erode, including their capabilities and even their pricing.

“The traditional regional outsourcer is going to have a very rough time competing with the global players,” says Michael Cannon-Brookes, IBM vice president for business development in China and India. “You’ve got to have the talent, you’ve got to have the infrastructure, and you’ve got to have the processes.”

As outsourcing customers develop globally standardized processes and systems, they are beginning to place more weight on vendors’ abilities to provide equally standardized capabilities and processes. In the long term, for example, work delivered from a center in Bratislava, Slovakia, will have to be fundamentally the same as that delivered from Hyderabad, India. Much of this movement toward global harmonization is being driven by multinational giants such as GM, for which the benefits of standardization are immense.

“In 2003, GM truly started globalizing its business processes. Until then, we had different processes by region,” observes Mr. Szygenda. “Now GM is beginning to run as one coordinated company throughout the world. We can design, develop, and distribute products from any part of the world to any other part of the world. There are no longer regional boundaries.” This globally unified approach enables suppliers to build a powerful risk mitigation strategy, insulating them from catastrophe in the face of operational failures in portions of their supply chain. Says Mr. Szygenda: “We wanted [the vendors] to see that this wasn’t just good for GM, it was good for them and maybe the IT industry.”

• Increasing Sophistication. It has taken years for outsourcing to grow up. Analysts have long predicted that outsourcing would evolve beyond the commodity services that have been its bread and butter and into areas that are more critical to the global success of customers. But through the 1990s, the outsourcing industry was fairly stable, dominated by large North American and European players — Accenture, ACS, Capgemini, EDS, IBM, and a few others — focused predominantly on information technology. The industry came to be governed by mega one-stop-shop deals under which vast portions of the IT and administrative functions were bundled and outsourced to a single provider; a labyrinthine, rigid 10-year-plus contractual infrastructure; a measurement culture focused on cost rather than service levels; and shaky relationship management not always appropriate to the scope and demands of the engagement. This environment grew not only out of the suppliers’ business model and cultural baggage, but also from the customers’ own tendency to turn to outsourcing as a quick-hit panacea to reduce short-term costs, and a belief that contractual complexity enabled greater customer control.

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  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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