- Offshore Outsourcing: Fad or Trend?
- Trend #1: Offshore Business Models Are Growing
- Trend #2: Outsourcing Firms Are Offshoring
- Trend #3: Product Engineering Is Headed Offshore
- Trend #4: Offshore HR and Transaction-Processing Apps Gain Momentum
- Trend #5: New Offshore Project-Management Skills Are Needed
Offshore outsourcing is everywhereboardrooms, newspapers, magazines, cable news, even chat groups. The noise quotient around offshore outsourcing is reaching epic proportions. In this article, we outline what's taking place in offshore outsourcing and its potential impact on your job. We separate the fads from the trends to assess the underlying market dynamics and help you better navigate 2004.
Offshore Outsourcing: Fad or Trend?
Offshore outsourcing, especially in software application development and maintenance, manufacturing, and logistics, is nothing new. Companies have been outsourcing offsite or offshore for at least two decades. What is new is the rapid growth in business process offshore outsourcing in areas such as customer care, transaction processing, finance and accounting, human resources, desktop support, and software development.
Why is it happening? To appease Wall Street, companies in the sluggish U.S. economy have resorted to a strategy of widespread cost-cutting as a way to make their earnings look more attractive. Management's actions to reduce costs quickly were predictable: Because employee salaries make up a significant percentage of operating costs, replace those employees with cheaper offshore labor to increase the profits.
However, like all overhyped management innovations, offshore outsourcing is bound to reach a short-term peak, especially in information technology. We have reached this conclusion by looking at the cycle followed by previous process-improvement innovations such as Total Quality Management, reengineering, and Six Sigma.
Typically, every management-driven innovation goes through four phases: hype, despair, consolidation, and assimilation (see Figure 1).
Figure 1 The shape of the offshore outsourcing market.
The Slope of Hype. Offshore outsourcing is currently in a "honeymoon period." In periods of hype, many companies initiate projects to gain experience with the current innovation. They also are often spurred into action simply because a competitor in the industry is doing it. We saw a similar trend with e-commerce and e-business in the late 1990s. Every company had to have an e-commerce strategy, and many took actions that in hindsight don't seem logical. In this period, a number of vendors enter the market and want to become your "trusted advisor" in the race to offshore. Venture capitalists fuel the hype by investing in a variety of startups.
The Slope of Despair. Usually the honeymoon period ends abruptly, and the market enters a period of disillusionment. In this phase, the offshore projects that were initiated in haste will fail to deliver on their promises and an internal backlash will ensue. We are beginning to see some evidence of a pullback with recent decisions by Dell and Lehman Brothers to pull their offshore help desks back in-house. The companies that aren't serious about offshore outsourcing at this point will begin to retreat and either reevaluate their strategies or cancel their offshore plans altogether. Serious companies continue to execute on the concept while the dilettantes scale back their offshore operations.
Consolidation and assimilation. Following the period of despair is a period of consolidation, during which the weaker vendors and me-too companies exit the market. We saw similar behavior in the e-commerce market: The market went through a period of consolidation and, in the last year or so, finally appears to be on the Slope of Profit. Many companies now view e-commerce as just another initiative they have to undertake. In other words, e-commerce has been assimilated and has become part-and-parcel of doing modern-day business. We expect the same to happen with offshore operations around 2007.
What does this mean for you? History shows us that corporate strategies tend to be volatile and closely follow the economy. If the economy recovers, we'll see the offshore juggernaut slow down. If economic recovery falters, offshore outsourcing is going to accelerate. In the long term, like the manufacturing migration to the Pacific Rim countries, business process and IT offshore outsourcing is bound to happen. There will be hiccups along the way, but the macroeconomic trend is pointing toward IT and business process globalization.
But the nature of offshore outsourcing is changing. In our research and consulting work, we're seeing five distinct trends for 2004:
The number and variety of offshore business models are growing.
The outsourcing firms are offshoring.
Companies are beginning to send product engineering offshore.
Offshore human resources and transaction-processing applications are gaining momentum.
In offshore outsourcing project management, new skills are needed.