Source2pay Blog So Much of Noise around Domestic Outsourcing - Is the Trend Real?

Globalisation requires companies to compete globally, and offer better products and services that are appealing to customers. In several industries, global outsourcing today enables the business value chain, providing a mechanism for corporations to achieve their globalisation objectives while keeping their costs manageable.Y2K served as the growth engine for the offshore outsourcing industry. Demand was largely driven by a need to access flexible capacity at a lower cost. The trend has been significant over the last decade as offshore providers introduced new services, improved quality, provisioned flexible capacity and continued to offer labour arbitrage benefits.Today, several factors are indicating a growing interest in domestic outsourcing. Domestic outsourcing means having work done in the same country by a different company. Within the USA, for example, development and operational centres in states like Montana, Alabama, Detroit, Wisconsin, Louisiana, and Maine are emerging and seeing increasing investments. Offshore providers are also recognising domestic outsourcing as an opportunity and are investing in centres staffed by US citizens. The "offshore" pitch is changing to the "right shore" pitch as clients look to balance cost with better quality of delivery.Several factors are contributing towards this trend.Industry and economic factors Rapid environment changes are prompting demand for agile, adaptable products that solve business problems and have faster time-to-market. Taking a rigorous process-centric view and translating development requirements and architectures to remote teams may significantly slow things down. In several situations, these expectations are best perceived to be met by domestic destinations with well-integrated, highly collaborative, and business-centric teams working on similar goals.Innovation becoming mainstream. Offshoring continues to offer strong execution skills. However, generating viable innovation has been slow. In several situations, the "connect" required to innovate may be best when services are being delivered in closer proximity.Government incentives and support. Several state and local governments are now offering incentives like reduced tax rates, lower capital requirements, and improved entity structures to encourage corporations to make domestic investments.Immigration policies are tougher today that they were ever and are favouring increased usage of the domestic outsourcing model.The cash deployment factor. The last four years of recession and an uncertain economic environment focussed corporations towards conserving capital by making investments in improving productivity and generating operational efficiencies. These investments are now reaching the point of diminishing returns. Companies today are flushed with cash and their focus is starting to shift towards increasing their top line. As the economy improves and hiring starts to grow, there is an increased probability that corporations will invest cash to generate more returns. The demand generated as a result of these investments may provide a boost to domestic establishments as several situations may favour domestic over offshore destinations with the current economic environment.Matured sourcing. More and more buyers are demanding matured sourcing capabilities to free up their bandwidth and manage providers by results. As a result how providers deliver services is becoming less of a client concern unless there are risk factors involved. Providers are therefore asking for location flexibility that provides them with a balance of cost, quality and timeliness. As a result, the trend towards "right shoring" to sustain high-quality delivery will continue to increase as providers establish domestic outsourcing capabilities.Offshore factorsLabour arbitrage benefits are going away. The labour arbitrage benefits associated with offshore locations are starting to disappear when you factor in wage increases, productivity loss, resource turnover, travel costs and other factors. Today, the dollar weakness is helping sustain wage differentials but that cannot be always expected.Typical issues with offshoring. Issues like language barriers and time and cultural differences can be some of the reasons to leverage domestic locations for certain types of work. Several customer-facing functions (e.g. call centres) may be best suited for domestic outsourcing for these reasons.Perceptions about job losses associated with offshoring. Ironically, media coverage of the loss of US jobs only surfaces when it relates to relates to offshoring. It does not come up for "domestic outsourcing", even though in many situations it has an equal potential for job losses and displacements within the same country.Offshoring risks. The risk tolerance for companies is different when they execute domestically. The risk controls required to manage reputation risks, data security challenges, intellectual property protection, consumer data protection etc for offshore require significant investments. Several risks like cultural respect for IP and the legal responsiveness of destination countries are unique to offshoring.Determine if outsourcing will add valueCompanies should first decide if outsourcing is even a viable option. If the service under consideration is a core competence and significant contributor to business success, it may be a candidate to keep in-house. Similarly, if the maturity level of the in-house organisation delivering the services is at the same or greater level of specialisation than leading providers'; it may not be a good candidate to outsource.The major motivation for in-house activities is to protect core products and process innovations. Locating core activities deep in-house can avoid encroachment from competitors, with proximity allowing for collaboration, closer monitoring and easy access to specialised resources and infrastructure.Determine your sourcing optionsOnce the decision to outsource is taken, careful evaluation of sourcing options and analysing the total cost of ownership (TCO), and skill levels should be conducted. Corporations must focus on carefully determining their business-aligned sourcing strategy and core drivers for sourcing mix (onshore execution v offshoring v domestic outsourcing). The answers will be different for different companies and will depend on closer review of scope with various factors like cost sensitivity, degree of user interaction, business domain, scope clarity, time to market, complexity, size etc.Enable the best option and task your PMOIf domestic outsourcing is a viable option, enabling providers will require a similar set of competencies and relationship management abilities that organisations implemented for enabling offshoring. The outsourcing programs (PMO) will be best positioned to provide leadership and support for such initiatives. I have shared details on maximising value from implementation of sourcing strategy and associated competencies in my bookTransformational Outsourcing. The complexity associated with enabling domestic outsourcing is actually lower than the complexity associated with enabling offshoring but it requires similar supporting operational and process frameworks.It is impossible to predict if the domestic outsourcing trend will continue; rather companies are advised to focus on the sourcing mix that provides them with the best value. A lot depends on how domestic destinations build maturity and deliver the promise of higher quality. The other factor that will determine success will be the investments in education and training to build the IT workforce. It is unlikely that industry will see any significant changes immediately. However, all sourcing models will be here to stay and will be preferred over others depending on specific situations.Copyright Sanjay Chadha - Please do not publish the content from this Blog without permission of the author.