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


How to Be an Outsourcing Virtuoso

There are many barriers to this goal in the short term, including the providers’ own relative lack of experience, but eventually such an approach could become the dominant method of the most successful players. Rather than task-based or time-based billing, “value-differentiated pricing is going to be very key,” says Subramanian Ramadorai, CEO of TCS, one of India’s oldest and largest outsourcing providers. “If I can improve the efficiency or performance of your process, we can structure a deal that benefits both of us. For example, if we automate a manual process — create a design model based on a CAD drawing into which you can simply enter your parameters — we can both share the savings.” Further, Mr. Ramadorai would like to develop new services in partnership with clients. “We’ll be able to charge for the intellectual property we help create, provided we can quantify the benefit to the customers,” he says.

• Interoperable, Commoditized Services. At the same time, the market will evolve to become significantly more accessible. Or so predicts A.R. Mullinax, executive vice president of Duke Energy Business Services. He envisions outsourcing eventually resembling a utility computing model, where services are purchased à la carte, as needed, without costly up-front investments and transition times. “Instead of having to go through the formality of sourcing contracts with long, fixed terms, we’ll buy services as one-time hits. It’ll be more like a competitive retail market for commodities,” says Mr. Mullinax. “Five years from now, customers will be able to say, ‘I just want a commodity accounts receivable billing service.’ That doesn’t exist today. You have to go through a big contract or you’ve got to get the software and your own computer.” In the future, instead of committing to a five- or 10-year agreement for accounts receivable services, customers will be able to plug into the service for short-term needs. Before this can become a reality, however, companies will need to let go of their proprietary processes and systems, and vendors will need to build capabilities and scale around a common set of standards.

Challenges and Caveats
Outsourcing is now entering a transitional period in which the most sophisticated suppliers and customers will shape the structure of the business-to-business service environment around the world. Every business, large or small, will eventually be plugged into this network of interoperable, interwoven processes. Tapping this network will be an absolute requirement for success. Not plugging in will cost a company its competitive edge.

To be sure, a number of challenges will inhibit the industry. These include credibility: Vendors will still need to convince would-be customers that they are capable and reliable, particularly for more knowledge-centric work. They will also need to reassure customers that sensitive information is safe in their hands. Says Leonard Liu, CEO of Augmentum, a supplier based in Shanghai: “It’s a problem that can be managed. We have a very stringent security system. But more important than that — the really, really important thing — is the culture. We must have a culture of high integrity, ethics, and discipline, so our people will not misuse our customers’ intellectual property.”

There are also profound implications for work-force management as the key differentiators change from cost to quality and service effectiveness, the offerings shift from simple transactions to higher-end segments of the value chain, and the delivery model moves from local to global. The business model of the future, with vendors serving as extensions of a company’s internal work force, and the need to manage a standard and interoperable business model globally, will require a clear labor sourcing strategy along with global training and knowledge management programs. It will also require a focus on such intangibles as cultural alignment across several dimensions, including the customer’s business culture and goals, the customer’s own customers, and the cultural norms of each country that the supplier serves. The longer-term direction toward transformational outsourcing will also drive vendors to invest far more heavily in people who oversee the customer relationship and steer the ship — project managers and account managers.

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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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