The Evolution of Offshoring and Why it Still Matters

There is a very good reason we are seeing a marked increase in the continued growth of offshore captive operations, they simply make sense. In fact, many of the major 3rd party Business Process Outsourcing players we know today originally started as captive or in-house centers themselves.

Birth of new model

Companies like GE Capital, Dun & Bradstreet and British Airways all established in-house operations offshore in mid to late 90’s. Originally created to support internal operations, they evolved into 3rd party service providers Genpact, Cognizant and WNS respectively. It was apparent that the benefits of economies of scale, and capitalizing on the labor arbitrage principals of supplying high skilled workers at lower costs, was beneficial to not only themselves, but to potential external clients, as well. This allowed the originating firms to realize ROI on their investments at an increased pace. Ultimately, the captives became stand-alone BPO providers, with the originators as initial clients.

Y2K, Crisis in need of a savior

Just as the fledgling BPO model was getting started, the very computers and telecommunications infrastructure that made the industry possible were creating its biggest boom ever. In order to save valuable space in the expensive memory and storage capabilities of the 90’s, the format for date codes represented the year in 2 digits (1999 = 99). When the inevitable year 2000 hit, computers would recognize this as 00, a major problem that many experts predicted. Thus, the need for programmers, and supply and demand laws, dictated the cost of local qualified resources increased. As a result, due to availability and cost, the labor arbitrage model came to the rescue.

High demand for customer service and fundamental IT skills

Now that the proverbial cat was out of the bag, many service-oriented companies were enamored with the potential of qualified workers at lower costs, and the offshore Call Center/BPO industry took off. Call Centers housing thousands of agents in specially designed facilities, operating at off hours in their home countries to support the day-time hours of their client’s customer base, were practically popping up like mushrooms.

Industry begins to mature

The initial CC/BPO model has proven very effective and many customers have enjoyed the significant cost savings. A toddler toddles for a while, but eventually gains confidence, picks up its feet, and walks. The BPO client base began to raise its expectations and soon wanted more.

Combine learned improvements with increased competition, and you now have an industry utilizing many methodologies like Six Sigma and LEAN for ongoing process improvement. Adoption of standards such as ISO to validate proper controls were put in place, and development and incorporation of advanced Workforce Management (WFM) and Customer Relationship Management (CRM) platforms were expected.

KPO – just like BPO only with specialty skilled workers

The CC/BPO industry has created an entire infrastructure with solid processes and measurements that niche players can capitalize on to provide highly skilled talent in a variety of focused customized disciplines (Medical, Legal, Accounting, etc.). The effects of global aging populations and lower adoption of particular skills in the consumer based countries, allows the often younger offshore CC/BPO provider nations to offer not just the “most cost effective” labor, but more importantly the “needed” skilled labor.

Everything old is new again

As the 18-time Yankee baseball all star Yogi Berra once said, “It’s like déjà vu all over again”. While pioneering captives were the foundation of the BPO industry, technology and infrastructure costs back in the day required significant capital expenditure to setup and maintain operations. Today, 25+ years of industry and infrastructure maturation have enabled an As-A-Service economy, and this has re-opened the doors to the significant benefits of the captive, in-house model. Now, many options to build an Operational Expenditure (OpEx) model exist, allowing the smallest of pilot projects to be cost effectively established, tested and proven with complete IP and end-to-end process control.

Source: ssonetwork.com-The Evolution of Offshoring and Why it Still Matters

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Why now is the time to bring Services back

The fourth industrial revolution will impact the way many enterprises conduct business. Advents in technology, infrastructure, communication and social interaction require every company that values its customer base and operating costs to re-evaluate the business models that brought it success in the past. Access to skilled labor at competitive cost is crucial to every operation, and is the primary reason for the creation and growth in the offshore, third party Business Process Outsourcing (BPO) model.

This model was initially predicated on carving out labor intensive, non-core competencies to benefit from the economies of scale, labor arbitrage and process standardization that third party BPO providers offer. However, the digital revolution is now blurring the lines between core and non-core aspects of operations.

As a result, in efforts to avoid intellectual property and/or proprietary process exposure, or maintain regulatory and compliance requirements, operational flows can incur a degradation of process efficiencies and an increase in customer dissatisfaction.

In this second article in our series, we will take a look at some of the factors you should evaluate to determine your company’s strategy for success in the digital age.

BPO Model Maturity

Along with the growth and maturity of the BPO business model has come industry level standardization and adoption of the many processes, policies and procedures required to perform and manage key business functions. These operations are often provisioned from talent rich, cost effective economies around the world. Many tools governing these processes, policies and procedures are now available in a cloud model, allowing niche-focused, Small to Medium Enterprises (SMEs) to capitalize on the same tools and functionality as large corporations.

This evolution has created a vast pool of tenured staff who are often siloed inside large delivery centers, many of whom are now exploring avenues of professional and personal development.

At the same time, BPO providers have enhanced their models by offering outcomes-based delivery, and recently, increasing consultancy services. Their belief is that hybrid BPO/SSC support models will strengthen relationships beyond client/vendor into true partnership models, with operational processes co-existing within the same geographical areas and perhaps even sharing facilities.

The Evolving Infrastructure and Technology Landscape

The “everything” as a service (XaaS) business model is transforming capability availability. Similar to VCRs, personal digital assistants and answering machines, there are many antiquated solutions that required significant Capital Expenditure (CapEx) to design, build and maintain the hardware infrastructure required to enable an environment where the costly business support infrastructure would reside.

Today’s Cloud Computing model changes the paradigm and is commonly recognized in three layers of functionality:

  • SaaS (CRM, WFM, etc.): Software for day-to-day operations
  • PaaS (AppDev): Platforms that provides robust, controlled environments for application development
  • IaaS (VM, VDC): Hosted Infrastructure providing the actual hardware

All are available virtually, on an as-needed basis. This includes immediate scalability with maintenance and support handled by the provider(s).

The same model has expanded beyond the virtual world, with many suppliers now offering facilities, staffing, process design and management support in the as-a-service model as well. This evolution has significantly reduced or eliminated the CapEx requirement, moving it to a much more favorable Operational Expenditure (OpEx) model where up-front costs are significantly reduced and applied only when required to facilitate growth and development.

Operational Control and Regulatory Compliance in the Digital Age

Due to regulatory requirement considerations, some processes simply cannot be outsourced to third party providers. The benefits of access to required, experienced, skilled labor in a cost-effective environment can still be realized, however.

This occurs when performed under an internal governance structure as executed by a satellite operation, wholly owned and operated under the corporate umbrella. The need for this overall governance and control becomes even more critical when working to realize the full potential of emerging technologies like Artificial Intelligence (AI) and Robotic Process Automation (RPA) to achieve true Intelligent Automation (IA). The power of these technologies requires more than just replacing portions of a process with automated BOTs. True incorporation requires review of the entire end-to-end process that most likely will create entirely new process flows, requiring access to data, internal systems or IP.

It also requires highly trained and experienced staff that utilize the output providing an ultimate solution. It may not be prudent to develop, implement and expose this with outside third party vendors.

True Omnichannel (Multichannel on steroids) support requires extensive customer experience monitoring and interaction. If internal operational management resources are required to oversee this, the question must be asked, “Should these resources oversee internal or external third party staff?” This can often be hampered by communication challenges and hand-offs between disparate systems and databases. The very nature of the distributed ledger aspects of blockchain, for example, can expose sensitive information, which is best administered via internal resources.

Now is the time

The time for serious re-examination is prior to implementation, as these variables can significantly influence current operating policies, processes and procedures.

As little as 10 years ago, a viral tweet involved a sick bird of some sort, while today it can devastate a brand overnight. The fourth industrial revolution is re-imaging everything into a digital landscape and the possibilities are only limited by action, or more aptly, inaction.

Does your organization have plans to capitalize on and incorporate emerging technologies to improve operating models and customer interaction? Are these plans reliant on third party service providers owning key processes or should an internal solution be considered? Were prior CapEx requirements and expenditures a limiting factor? Does access to staff experienced in required operational disciplines cause concern?

The enterprise needs to determine what actions are required to thrive in the digital world.

Just be aware that past operational models most likely will not get you where you need to be in this rapidly evolving digital landscape.

Source: ssonetwork.com-Why now is the time to bring Services back

Why offshoring doesn’t matter

Recently, an enterprise client was debating whether the offshoring ratio — the percentage of resources located off versus on shore — proposed by a service provider was too high, too low or just right. About a half-hour into the conversation, I realized we were asking the wrong question altogether.

Trying to discern what constitutes too much risk when it comes to offshoring has been a common exercise for years. After all, the cost implications are significant. Service providers tend to get aggressive with offshoring because a) they have more people there, and b) it allows them to present a lower total cost when competing for business. Sourcing buyers, however, especially less mature ones, feel more comfortable with a larger onshore presence and may or may not understand how it impacts their business case.

Does the question about percentage of resources offshore matter? I’d say, not very much.

The world has changed. First of all, most providers that work with Fortune 500 clients are large and experienced — they are not in the business of taking on more risk than is reasonable. More importantly, as long as they commit to service levels their customers find acceptable, who cares where the work takes place? The challenge, contractually, is to make sure service levels trump all else to keep the provider focused on what does matter.

But the real reason the offshoring question doesn’t matter is because it is an obsolete one. It asks: Do you want expensive human resources close to you or do you want cheap human resources far away from you? And the answer to both of these is no. What you really want is a non-human resource. You want to automate as much as possible so human creativity can make a difference elsewhere, where it counts.

When software robots reduce the volume of work related to repeatable processes, humans can then focus on what the robots cannot do. Instead of counting bodies, you want an aggressive rationalization program that reduces the number of applications you have to maintain (and thus the number of people maintaining them, regardless of where they sit). You want strict compliance where it matters — places where robots are demonstrably better than humans — and extreme creativity elsewhere. (Some humans still have the edge here, but they are rare, and you should hire them wherever they are.)

It will take time for companies to move away from the obsession with offshoring ratios and what they consider to be the risks they pose. Today’s outsourcing buyers and providers should be asking a different kind of question about risk: What are the risks of not automating these functions? And what new risks does automation create?

The offshoring debate is yesterday’s debate. We need new incentives to encourage no-shoring — an environment where physical location is meaningless because code does the work.

Source: cio.com-Why offshoring doesn’t matter

IBM Should Cut Down On Outsourcing To India

BM remains an American-based, not an Indian- based company, as a recent New York Times article gave the impression to some readers when it claimed that IBM employs more people in India than in America.

IBM may have outsourced a great deal of its operations around the world as many other large companies have done, but its center of gravity remains in America. IBM was founded in the U.S. 106 years ago, and its headquarters and major research facilities remain to the U.S.

But IBM is an American company in decline, as evidenced by the long string of drops in its sales.

IBM’s Key Financial Metrics 10/6/2017

Forward PE Operating Margin Revenues (ttm) Qrtrly Revenue Growth (yoy)Div&yield 10.63 16.22% $78.44B -4.70% 4.16%

Source: Finance.yahoo.com

IBM’s Key Financial Metrics 1/17/2017

Forward PE Operating Margin Revenues (ttm) Qrtrly Revenue Growth (yoy)Div&yield 8.78 20.88% $83.80B -13.90% 3.91%

Source: Finance.yahoo.com

The root cause of IBM’s long decline is the failure to make a timely transition from the traditional mature declining business segments to emerging fast growing segments.

To be fair, IBM’s revenues from “strategic imperatives” (cloud, Watson and analytics, security, social and mobile technologies) have been rising in recent years. But IBM is late in this space, which is already crowded with heavyweights like Amazon, Microsoft and Google.

Apparently, IBM’s leadership has been spending too much time to revive its traditional business rather than to renew its pioneering drive that made it a great technology leader back in the old days.

That raises a simple question: why keeping the old business around, anyway? Because these businesses are outsourced at a lower cost to India and other locations.

But that has been a trap. Outsourcing hasn’t helped IBM improve its operating margins, which continue to slide — see tables.

Besides, outsourcing leaves management with fewer resources to plow into new business initiatives. Hence, the slow speed of transition from traditional business segments to new business segments.

Wall Street has taken notice, sending IBM’s shares south as the rest of the technology shares have been soaring. Over the last five years, IBM’s shares have lost close to 30% of their value, as the Powershares QQQ have gained 121.26% — see table.

IBM versus S&P 500

Company/ETF 1-year Performance 5-year Performance IBM -6.80%* -29.59%*Powershares QQQ trust 24.19 121.26

*It doesn’t include dividends

Source: Finance.yahoo.com 10/18/16

Outsourcing provides certain competitive advantages to early-movers – that is, to companies that adopt it first — but it isn’t proprietary. Others can adopt it, and therefore, isn’t a source of sustainable competitive advantage.

Then there’s corporate complacency whereby leadership of these companies fails to renew the pioneering drive that characterizes market leaders.

That’s what eventually happened in the PC industry, to companies like the old HP.

Outsourcing was supposed to cut costs, limit corporate size, and improve operating margins. But instead it ended up giving HP’s advantage away to Asian PC and printer makers, piece-by-piece, failing to re-ignite sales growth.

Meanwhile, HP failed to revive its old pioneer drive that made it a great technology company in the first place.

The rest is history, which IBM will be destined to repeat. Unless it scales back on its outsourcing activities in India and other locations.

 

Source: Forbes-IBM Should Cut Down On Outsourcing To India

How to Reduce IT Outsourcing Costs Without Going Offshore

When we’re talking about significantly cutting IT costs, we’re typically talking about tapping offshore markets where labor costs are significantly lower.

But going offshore always comes at a price, typically in the form of reduced efficiencies caused by communication breakdowns, cultural misunderstandings, time differences, and combinations of those problems and many others. Still, the cost-savings are a powerful draw. You can have better interaction and quality with full onshore team, but that comes with a high cost. What if we could have something in the middle?

There is another approach, which I call global shoring, which is very less talked about, is providing the cost-saving advantages of offshoring without any of the disadvantages.

The an equation representing global offshore modeling would look something like this: Senior team onshore + mid and junior team offshore = high quality and lower cost.

Initially implemented by large IT outsourcers, the global shoring model is now being adopted by mid-sized companies and small startups. With global shoring, a project’s leads, such as project manager, technical architect, designers, and senior QA professionals, are provided onshore, while developer, testers are offshore. Onshore team interface with the customer and perform high end responsibilities, while simple, routine, and repetitive processes are performed offshore at a significant savings in labor costs.

Global shoring has some surprisingly attractive advantages beyond the labor cost-savings.

Seamless Communication and Project Management

Having project managers and technical leads onshore enable you to talk with them on your time and your terms. The communication advantages are enormous when everyone is in the same time zone and on the same page culturally and technically. Problem-solving is faster, easier, and less chaotic. Complex misunderstandings can be eliminated with face-to-face, on-site appearances. It is always easier to explain your vision and needs to a team that is in the same country as you and understands your industry, company, and product cultures the same way you do. Your on-shore management leads can insulate you from having to navigate all the time, language, cultural barriers, and other obstacles to efficiency that offshoring can pose.

Intellectual Property Rights (IPRs) are Better Protected

When you hire a global shoring company with offices in same country as yours, your contracts will be in the law of the land. That means it will be easier to find and enforce any IPR infringement or copyright issues with a global shoring company than with an offshore company. If an offshore company infringes on your IPR, your legal options will be fewer, more complex, and costlier if the case must be pursued overseas.

Greater, More Focused, Quality Control

A global shoring company will provide senior QA and tech leads onshore, and, because they are overseeing offshore processes, a more deliberate and disciplined quality assurance approach must be taken. Time and calendar disparities will be planned for and accommodated in project timelines, ensuring that requirements and testing standards are met.

Better Customer Support (One, Much Closer, Throat to Choke)

If something goes awry in IT services provided by a global shoring company, you will know you can always reach out to them in the same time zone and they’ll be able to respond to you much more easily than an offshore company on a different continent and in a different time zone. Plus, proximity carries a greater weight of responsibility. It’s always easier to ignore someone a world away, than it is to ignore someone who could be knocking on your door later in the day.

Cost is Cheaper than Onshore

A global shoring company will charge you rates somewhere in the middle of a full onshore company and an offshore company. That is still a great cost advantage. Typically, a global shoring company will do 30- to 40-percent of a project’s work onshore and 60- to 70-percent of the work offshore. The final savings are difficult to turn down, especially when they come without the disadvantages of full offshoring.

Global Shoring Creates Jobs Onshore

The best part of hiring an onshore company is knowing that you’re getting the advantages of offshoring, but you’re also helping to create jobs in your own country. In today’s business and political climate, that’s an attractive message to be able to communicate. global shoring provides you economic benefits while helping to support your own country’s economy.

Source: Inc.com-How to Reduce IT Outsourcing Costs Without Going Offshore

The impact of new digital business models on IT services

Suddenly, on-shoring is becoming more in vogue. Like many U.S. CIOs and their C-suite colleagues, you may be actively exploring how to duplicate or offset the loss of cost benefits from offshore/labor-arbitrage services. I have good news for you, along with a crucial tip.

Four primary factors are driving U.S. companies to make the move to onshore service delivery:

  • Uncertainty associated with the potential of changing tax laws and border taxes, which could introduce a tax of 20 to 30 percent on services done offshore.
  • Potential changing regulations and increasing regulatory pressures to relocate work from offshore resources to the U.S.
  • Potential of reputation damage of companies called out publicly in the news media for use of offshore workforces.
  • Uncertainty around rising costs due to changing immigration laws and use of H-1B visas, which could make offshoring more expensive for service providers and increase barriers.

Although these factors vary by industry and company, the net result is companies are looking even more closely at digital technologies and digital business models to offset the cost benefits of offshoring.

Let’s look at how these digital models apply to IT.

IT infrastructure

Many firms support their legacy infrastructure offshore and have significant teams in what is called Remote Infrastructure Management Outsourcing (RIMO) done offshore. A digital model applies to this in two ways:

  1. Cloud. It will accelerate the move to private and public cloud models. When you move to the cloud, you move into a highly automated environment, thus dramatically lowering the number of people to support the infrastructure. You can use that savings, and potentially the necessary support people can be more easily afforded onshore.
  2. Automation. By applying automation tools to the legacy IT infrastructure, you can dramatically reduce the number of people needed to support the legacy environment, once again making it more affordable to have the remaining people operate out of the U.S. instead of offshore. For example, you can eliminate 40 percent of the FTEs by using tools such as IPSoft’s Autonomics (featuring virtual engineers and toolset for all components of IT service management) or TCS’s Ignio (a cognitive system for enterprise IT operations). These digital models and technologies change the economics, making it much more affordable to do this work onshore rather than offshore.

DevOps Toolkit

Applying the DevOps set of tools (self-provisioning, automated testing, agile methodologies) in an IT shared services organization creates up to a 30 percent productivity benefit. A 30 percent increase in productivity goes a long way to offsetting some of the offshore/onshore cost issues.

In truth, these productivity gains can be captured using an offshore model. So the argument is a little more complicated because the opportunity to apply DevOps tools and techniques to shared services is independent of location. But if you adopt them, it will lessen the impact of moving work back onshore.

In a DevOps model, it’s necessary to move to cross-functional teams in pods aligned to the business that operate from app development through IT infrastructure. Designed to be highly productive teams, these IT employees naturally want to be close to the business users – therefore onshore. Using this model, we find companies enjoying substantial productivity gains well over 100 percent, which more than offset labor arbitrage/offshoring losses.

Source: cio.com – The impact of new digital business models on IT services

What 20 Years as a Remote Organization Has Taught Us About Managing Remote Teams

In his 1974 interview with ABC News, science fiction author Arthur C. Clarke painted a picture of how computers would change our way of life by the year 2001. One of his many extraordinarily accurate predictions: “Any businessman, any executive, could live almost anywhere on Earth and still do his business through a device like this.”

Now, this prediction about remote working has not only come to life; it’s proved to be more beneficial than the traditional office model for some companies. The advisory firm we work for is one such company. Since its inception, in 1995, ghSMART has been a firm with a completely remote team. More than 80% of our work is done by teams of consultants and staff who operate out of their home offices. It’s working for us: ghSMART has seen more than 97% client satisfaction in the past decade, 93% team retention, and greater than 20% annual growth. Our journey of more than 20 years has led to a lot of success and has taught us some valuable lessons for how to make remote arrangements work:

Hire the right people. Having remote team members requires that we hire people who can deliver technically while working independently. At the same time, the fact that we do not have to maintain physical offices leaves us room to pay higher wages than others and attract top talent. By spending up to 42 hours researching and interviewing a given candidate, we take great care to ensure that we find and hire the right people. We don’t stop at interviewing and choosing good candidates; we give them detailed insight into the company’s finances, strategy, individual consultant performance, and implications on compensation so they can make a fully informed decision about whether to join us. We have learned that both we and our talented candidates make the best decisions when we provide each other with a large amount of good information.

Focus on outcomes. After spending as much effort as we do in bringing the right people into the firm, it only makes sense to set them free. The first and most important step in doing this is to set expectations. We tell our new teammates exactly what outcomes matter to us, and reward them for achieving and exceeding those outcomes. We do this through a scorecard that we give to consultants and staff members for their individual roles. As a leadership team, we strive to maintain consistency in the outcomes for each role so everyone knows exactly where the bar is and that it is not going to change unexpectedly. Once clear, consistent outcomes are set, management conversations shift from exercises in delegation to problem-solving sessions. Less micromanagement leads to more choice, decision making, freedom, and accountability at the individual level.

Help employees choose, and be responsible for, their own adventure. By determining the right floor and not restricting the ceiling, and by paying for value (once they exceed their outcome, consultants are paid a commission proportional to the additional work they deliver), we put the choice of how hard to work in a consultant’s hands. Our team members have the freedom to, say, take their child to a doctor’s appointment in the middle of the week while doing leadership coaching work with a CEO. Each consultant is free to choose the type of work they want to do, whom to do it with, and when to do it. We provide all our teammates with the information on what work their colleagues have done, and plan to do in the near future, so they can pick and choose where they want to serve.

Outside of client work, we allow teammates to invest in other areas, and even provide them resources when required. For instance, we often announce an innovation budget and invite applications to pilot ideas. As a result, our teammates voluntarily design new practice areas, conduct cutting-edge leadership research, and write books. We’ve noticed that our team members adopt a strong sense of commitment to the responsibilities they take on and do not abandon them when the going gets tough. They feel true ownership. Our leadership team ensures that this balance between choice and commitment, and the value of owning the outcome, is a respected, celebrated cultural attribute.

Centralize thoughtfully. We focus on letting our team members be the “CEOs” of their professional lives, but we have learned over time that not every aspect of choice adds value. For example, we previously enabled consultants to choose their own health care plan providers, and even set up their home office the way they wanted, but have since moved to a company plan and standard IT package to launch our team. This makes their lives easier without taking away the choices that truly matter. While there are more instances of such centralization, our leadership team maintains a very high bar for such decisions because too much control can erode mutual trust.

Arthur C. Clarke’s vision of a new world of remote work has largely come to pass. In a 2014 survey of business leaders at the Global Leadership Summit, almost 60% of leaders said that more than half of their workforce would be remote by 2020. Every year we learn more about the benefits of remote work, including increased productivity and the ability to attract Millennial workers. We have lived the benefits of a remote model: Our two-decade commitment to individual freedom and accountability has helped us turn our “remoteness,” which some might imagine would be a disadvantage, into a critical lever of our success. We encourage you to experiment with outcome-based, decentralized models as you seek to get the most out of your remote teams. We may have landed on a model that works only in our case, but we suspect that it can work for you, too.

Source: Harvard Business Review- What 20 Years as a Remote Organization Has Taught Us About Managing Remote Teams