Labor will be the driving factor that changes outsourcing in 2008. How companies determine who to hire and where they will work will affect the industry in two ways.

First, labor arbitrage is undergoing a metamorphosis. In the past, the megatrend was to use labor arbitrage wherever possible. Buyers found they could enjoy cost really significant savings with no impact on quality if their suppliers used labor in low-cost areas. The equation was simple: tasks that could be done remotely moved offshore.

Today, that equation is changing. Today buyers want to alter how they use employees. But now it’s not just sending them offshore. Now buyers want to change other services in which labor is a component. This is changing the fundamental way suppliers provide services.

For example, how the industry thinks about providing IT infrastructure is changing dramatically. First, a component of IT infrastructure labor is moving offshore. But more importantly, other components of the labor equation are transforming because of the advantages provided by the offshore model. This is enabling a completely different kind of IT infrastructure outsourcing. 2008 will be the year remote infrastructure management outsourcing (RIMO) takes deep root.

Offshoring Leads to the Rise of RIMO

The RIMO model facilitates an asset-light outsourcing deal. Now the necessity of transferring assets has vanished. In fact, transferring assets can be a detriment in this kind of outsourcing. RIMO is moving the industry away from a one-size-fits-all model that’s all inclusive to an offering comprised of a series of components suppliers can use in a plug-and-play world to optimize their infrastructure environment.

Buyers of traditional IT infrastructure deals had to buy into a trade-off of loss of control and up-front investment while hoping for a long-term cost reduction. In the RIMO world, buyers still retain control of their IT assets. For some buyers, retaining control gives them more corporate flexibility. However, now there is more management responsibility.

In most cases the cost savings are the same or greater when comparing the RIMO model versus the traditional one. So the decision is: how do you want to manage IT assets?

The Offshore Equilibrium

Trend two: outsourcing is starting to see the limits of labor arbitrage. Until now, the industry experienced an unconstrained movement of work offshore. If the supplier could document the process so someone else could perform it, off it went.

Ever since offshoring began in 1991, we have wondered just how far businesses can extend the offshore model. How many applications and what business processes can cost less through labor arbitrage? Where is the boundary between what companies can and can’t offshore?

Until now there were no boundaries in sight. The stellar performance of the Indian offshore sector seemed limitless.

Now, however, we are beginning to see restrictions. We see early signs that large, experienced corporations with mature relationships are discovering limits to what they can offshore. These companies have tried to push work into remote management either by fiat or by contract. But the work somehow repurposes itself. No amount of contractual guarantees or organizational determination seems to solve the problem. That’s because they’ve butted up against offshore equilibrium, which determines the percentage of work that outsourcing buyers can offshore, either to a third party or their own captive.

In 2008 buyers will begin to seriously bump up against those limits.

What are these limits? We have found two things always affect the offshore equilibrium:

• Buyers only face the equilibrium’s challenge in mature relationships
• Each buyer has different, idiosyncratic factors that change the equilibrium percentages

Three things constrain the amount of work buyers can send offshore. They are:

• The buyer’s corporate culture
• The buyer’s industry or vertical
• The buyer’s internal organization. For example, is its IT centralized or federated?

Historically, pundits posited that the equilibrium would follow Pareto’s Principle or the 80/20 rule: buyers could send 80 percent of their work offshore and retain just 20 percent. We have found that equation is too aggressive for offshore equilibrium.

Industry Implications

This equilibrium has an important implication for the future of the outsourcing industry. It suggests that offshoring will hit a wall. We predict its growth will start to slow in the next 12-18 months.

Once again, offshoring will have to look for transformational opportunities, just like it did in the IT infrastructure management space. The nature of work will focus more around transformational opportunities rather than just lift and shift.

Labor used to be the transformation. Now it is becoming the transformer.

Lessons from the Outsourcing Journal:

• Offshoring will change the industry in two ways this year. It used to be the transformation itself; now it is the transformer.
• Trend one: Labor arbitrage is changing other services in which labor is a component. It has allowed the viability of remote infrastructure management outsourcing (RIMO), which is a radically new way of managing IT infrastructure.
• Trend two: There is a natural equilibrium which determines just how much work you can send offshore. Some tasks have to be done at headquarters or onshore. Mature buyers will begin running into these barriers in 2008.
• The natural equilibrium will slow offshore growth in the next 12-18 months.