Peter : There has been a drastic change over the last five years as the global sourcing model has evolved. Five years ago people were very skeptical about it and were experimenting particularly in financial services sector. But today the dynamics has changed. As a result, the size of the outsourcing contracts has reduced dramatically. Five years ago, they were substantially bigger, the reasons for which are quite apparent.

Today everyone accepts that offshore labor is critical particularly in a labor intensive model. The labor arbitrage is one fourth of the actual price. Further over the time it has been realized that the business model needs to be simpler. With a simple model, the customer would not have many complexities.

Thus it will be easier to use, against the big contract, one would prefer to do a series of small contracts which are easier to manage.

Further this will reduce complications and will create more value proposition.

Peter : Historically, it has been a win-lose proposition. Now there is a need to establish the necessity to make it fairer so that the relationship can be endured over a long time horizon. To ensure the same, both parties would need to accept a win-win proposition. There should be an agreement in adopting a simple business model as complex and hard models can lead to lack of transparency which eventually breeds distrust.

Easier to comprehend and gauge the quality of work are the key advantages of a global sourcing model.

Thus, simplicity of a model makes a fairer agreement. Requisite transparency between buyer and customer results in buyer’s comfort for the supplier making profits. In a global sourcing model, both parties make profit and mutually recognize this fact. One party tolerates on the profit margins of other party, as they realize that each one is specialized in executing a task, which the other can’t do. But in complex mechanism, one has to guard against the profit margin. Further, complexity introduces risk and perception of over-paying.

Universally the highest margins of outsourcing are in those relationships which are attributed to the simple model of global sourcing.

Thus, global sourcing model tends to be fairer than any other model.

Peter : Quality is indispensable. The customer community over a time has realized that the quality of delivery is very important, hence raising the concerns about the quality of services they are getting. I can say it is general awareness.

It’s no longer about getting what you pay for, mutual strategies or just about being efficient but also being more effective. One needs to ask himself, “Am I making business value in doing this?”

Further as global sourcing penetrates, it raises the fact that the effectiveness issue is more important which leads to various implications for the supplier/vendor. Now as effectiveness becomes more important, the customer looks for someone with more capabilities. An ideal supplier would be the one who can help the customer think and connect the dots better, one who can be more of a partner or an ally to the customer. This is because every customer bears the risk of losing the sight of the objectives. Thus for a fruitful long term relationship one needs to seek a partner rather than just a provider.

Brands are sought in the same way as they have proven records of being more supportive.

Peter : It is the biggest value creation for any company outsourcing these days, though it has some constraints. But still, off shoring has transformed the whole outsourcing landscape. It is one of the those things I refer to as TINA i.e., There is NO alternative. It has become a de-facto way to think about outsourcing. It shall always be the most powerful ingredient in transforming solutions and the overwhelmingly acceptance of global sourcing model has simply won the day.

Peter : There would primarily be three functions in this regards.

Seeking the brand and the quality of the firm – One would always want to tie up with a highly qualified, trusted company. But before doing that one needs to find out who do they trust and are they trust-worthy. IBM and Accenture are the names of that standard and it’s good to see that a few Indian firms are also joining the same league of brands and are exhibiting the ability to build the relations.

Location – In offshore outsourcing, most risks and benefits are captured at city level. Any one who has seen it would know that cost difference of having your people at Bangalore or in a second or third tier city is very substantial. Further risk associated with service can be greater or lower. For example, risk in Bangalore would be very high turnover. On the other hand, one of the risks in second tier city is the access to talent. If you can’t get the talent, then it’s a big risk.

There are different risks at different locations and they change over time. Bangalore has a different risk profile now than it had 3 years ago. It was hot then, and now it’s super hot.

Skill – Risk also changes with type of skill that one is looking for. Bangalore has a different risk profile for IT, but an absolutely different profile for call-centers and Finance & Accounting. Also, Gurgaon would have a different profile for technology as more of BPO business is associated with city.

Thus risk is a function classified by skill, provider and location and needs to be mapped well in advance.

Peter : It’s important to find someone who has capabilities, trust and domain expertise for strategies to best align with the business goals. Expertise especially holds relevance in this scenario. For a call-centre, one would have fewer concerns about the industry skills and would instead look for language and basic educational skills. But further extending, if one looks for vendor who can do customer service for a technical product and can also link back to CRM to help segment that market better, then one would look for people with language skills, professionalism, product expertise and deep understanding of marketing in retail segment. Thus as one moves up the value chain, one tends to become more strategic and more integrated so as to make a more profound impact on the business.

Hence, you end up raising the bars substantially as per your need.

Peter : As companies increase their use of global sourcing, their thinking about it changes. As they realize that a significant portion of what was done in-house is now done in remote countries, the strategic importance of outsourcing becomes higher. They understand that there is more risk associated with it now at a higher level.

That’s the time when they start thinking more concretely about what kind of risks are associated with it. Forex (foreign exchange) can be one example where a small change in rates can cause much of botheration. Even regulatory authorities are becoming more demanding and asking the customers to understand more deeply about their risk profile.

The end result is that as one gets to learn more about outsourcing, one gets more sophisticated in risk management.