12 Outsourcing Trends: Out with Labor Arbitrage, In with Added Value

Labor arbitrage is so 2000. The new trend in outsourcing is added value.

That’s according to several experts whose brains I picked to determine the top outsourcing trends for the next year or so. It started with a post I wrote citing a Forbes article that contained five outsourcing trends submitted by Anirban Dutta,  director of Global Strategic Business Development at IT services company CSC and co-author of “Winning Strategies: Secrets to Clinching Multimillion-Dollar Deals.” His trends hinted at an outsourcing environment in which clients are seeking benefits that go beyond labor arbitrage and suppliers are trying to provide it using technologies such as virtualization and experimenting with new pricing models.

When I asked other outsourcing experts for their takes, I got a snapshot of an outsourcing industry in which clients are trying to get more for their money, but not necessarily by negotiating for the lowest price. Instead, they are doing things like looking more closely at managed services (a trend cited by Ross Tisnovsky, VP of research for global consulting company Everest Group), and asking providers to help identify costly inefficiencies within the client organization’s operation and advice on correcting them (cited by Bill Fowler, principal consultant, Compass Management Consulting).

To be sure, outsourcing clients are still renegotiating existing contracts, a major trend seen in 2010′s first quarter, as revealed in TPI’s just-released Global Outsourcing Index. Contract restructuring, which includes renewals, renegotiations or expansions of existing contracts, accounted for 42 percent of the outsourcing activity in the quarter. There were fewer new deals.

TPI expects that trend to continue, but with a twist. It says that while clients are leaving the bulk of their original scope with incumbent service providers, increasingly they are splitting up portions of the original scope and awarding it to other service providers in a best-of-breed approach. This is especially true in large IT outsourcing restructurings, specifically in the applications, desktop and network services areas, say TPI analysts.

Cloud computing was mentioned by several of my sources. Everest Group’s Tisnovsky said services providers have been offering cloud for years with business-process-as-a-service. He said:

Any business process outsourcing, or BPO, is by definition conducted from the cloud. Look at ADP payroll services. ADP has been around for years. Their customers didn’t know they were using the cloud until guys like me came forward and said, “Yes you are using the cloud.The other three “layers” in the cloud stack are software-as-a-service, platform-as-a-service and infrastructure-as-a-service. Tisnovsky called SaaS an “ongoing phenomenon” that’s more than a decade old. While PaaS is “an interesting and smart concept,” he said it isn’t appropriate for legacy applications. IaaS, the most ambitious “layer,” is also the most problematic, in terms of integration, data management and other issues. Tisnovsky looks for a new variant called operations-as-a-service to make an impact in the coming months.

TPI analysts say cloud reality has yet to live up to the hype. They say “there is more planning for potential cloud computing opportunities rather than actual cloud computing execution built into contracts right now.”


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