November 8th, 2008

The change imperative: it's back-to-basics time

Posted by Phil Fersht @ 8:03 am

Categories: Business Process Outsourcing, Finance & Accounting Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Outsourcing & Politics, Procurement Outsourcing, The Future of Outsourcing

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Even though you are probably more interested in the breed of puppy Barack is going to buy his girls, I have had a chance to ponder the realities of the recession.

In a nutshell, we have reached a crucial juncture in our economic history:  gone are the days we can borrow whatever we want to subsidize ambitious business ideas, buy houses we cannot really afford, or fritter money away on expensive holidays. Walking down Boyslton Street at 7.30pm last night - one of Boston’s prime restaurant areas - every restaurant had vacant tables and was taking walk-ins.  It really hit home to me that things have finally changed.  Years of over-spending have finally caught up with us and we’re now feeling the pinch.  But whether this was to be a rapid banking meltdown, or a long painful slowdown, this had to happen eventually. 

I recall sitting on a panel at at outsourcing conference in New York City back in 2004, and there were protesters outside, demonstrating their frustration about US jobs “moving offshore”.  In response, a sourcing attorney declared, “outsourcing provides a great opportunity for the US - 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 US 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 confided in me recently, ”we should bring over the training leaders from the top Indian outsourcers and have them work with US businesses to get their act together”.

What continues to irk me, is the fact 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 US automotive industry grind down to its current predicament - and have done nothing.  And we are seeing the IT and BPO 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 flagging automotive industry.  How did it come to this?  Years of greed, a deterioration of our work-ethics, and eager 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. 

It’s about accepting 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 US.  The US people have spoken that they want change, and they have voted in a President promising change.  The core question now is whether they are really prepared to change.

October 18th, 2008

Can the next President turn the USA into a competitive sourcing location

Posted by Phil Fersht @ 7:06 am

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Outsourcing & Politics, Outsourcing Locations

Tags: Fersht, Outsourcing, Obama, McCain

We’re in the final throes of the most enthralling and contentious election in years - and John McCain or Barack Obama will likely have a very different impact on the
USA’s potential as a sourcing location.

With the financial crisis upon us and a troubled economic period in store for the medium-term, higher unemployment, a weak dollar and lower labor costs are combining to increase the attractiveness of low-cost USA locations for global services.  We have already seen leading offshore service providers significantly bolstering their onshore US presence, with, for example, TCS establishing a major service delivery facility in Cincinnati, Infosys in New Jersey, Wipro in Atlanta and Cognizant in Phoenix.  Offshore services must be augmented with client-facing onshore services, however, with the onshore costs lowering and new (potential) government policies to encourage US business to keep jobs stateside, we could see the USA emerge as a highly attractive sourcing location for global services providers.

What is clear, is that shipping jobs offshore isn’t necessary very good for the US unemployment rate - the age-old argument of focusing US staff on “higher-value” work is wearing a bit thin these days.  What’s more, many offshore service providers are now focused on taking on more higher-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 ownsand 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?

We’ve now been sucked into a global employment war for sourcing services, and from what  Mr Obama ha stated this week, he intends to give US 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 plans to provide benefits for buyers, as opposed to the providers, to source work to onshore US 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 10-20% 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 US 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, on the other hand, is significantly cheaper in locations such as India and China for all levels of services.

Here’s my take: 

For BPO services, the US is still in the game.  The issues surrounding client / employee contact still favor onshore services (even though offshore services are improving by the day), plus the fact that 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 US 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 infrastructures.  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 the skills in basic programming are widely available for mainstream applications.  Even if US 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 deliver 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.

February 25th, 2008

Outsourcing in a downturn

Posted by Phil Fersht @ 11:22 am

Categories: Business Process Outsourcing, IT Outsourcing / IT Services, Offshoring and Captives, Outsourcing & Politics, Outsourcing Locations, The Future of Outsourcing

Tags: Phil Fersht, Outsourcing economic downturn, recession, IT outsourcing, eWeek

Podcast:  Outsourcing in a Downturn:  Yours’ truly discussing the potential ramifications of an economic downturn on outsourcing trends with AMR Research’s CEO Tony Friscia. 

February 19th, 2008

Outsourcing links for February

Posted by Phil Fersht @ 4:29 pm

Categories: Business Process Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Infrastructure Management Outsourcing, Outsourcing & Politics, Outsourcing Locations, The Future of Outsourcing

Tags: Human Resources, Value, Outsourcing, Government, Strategy, It Operations, Business Operations, Outsourcing & Subcontracting, Management, Phil Fersht

Will China’s Internet purges inhibit their knowledge services industry? :  Interesting commentary on the fact that the Chinese government is working extremely hard to increase its level of censorship and keep the Chinese Internet-world sectioned off from the rest of the world.

Human Resources Outsourcing: Where’s the Value? :  Great insights on the purpose and value firms have experienced outsourcing their Human Resources function.

The NASSCOM 2008 Diaries: More Fog on the Windshield :  AMR Research’s legend, Bruce Richardson, on his experiences and takeaways from the recent NASSCOM event in India.

Renewal Strategies for ITO Relationships : Peter Allen, TPI’s thought-leader on all things outsourcing comes up with some interesting strategies for firms looking to get more value from renewing their relationships with their IT outsourcing provider.

February 3rd, 2008

The 2008 Election and Outsourcing... have your say

Posted by Phil Fersht @ 7:20 am

Categories: Outsourcing & Politics

Tags: Barack Obama, Hilary Clinton, John McCain, Mitt Romney, Mike Huckabee, Offshoring of US jobs, Outsourcing, Outsourcing and 2008 Election, Rudi Giuliani

I have been taking a close look at the main candidates for the 2008 Presidential Election to dissect what (if anything) they plan to do to promote / restrict outsourcing services if they get elected.  While they all need to be seen to be openly “protecting” US jobs, they also need to protect the motives of business leaders, many of whom have a vested interested in outsourcing, increased H1B allocations and funding the campaigns of the hopeful candidates.

In the meantime, I thought it would be interesting to have a “reverse poll” and get your take on who you would LEAST like to see in the Whitehouse next year (as we’re so spoiled for choice, you can select your two most unlikeable candidates).  Vote on the scrollbar to the left. 

Let’s keep this conversation rolling…