The Future of Outsourcing

The world is in a state of constant flux, and one can never predict which trend is going  to disrupt  traditional  business models, or which  current trend is going to become irrelevant  in the  future. For instance,  while  offshore outsourcing  is  a mega  trend and  irreversible force  today, few  analysts could have predicted the rapid  movement of IT related work to offshore locations.

Out of this minority, a further  few  would have  expected  Indian IT players handicapped by infrastructure challenges to create a disruptive model that has forced global majors to significantly alter their business strategies. In this new business environment, where the dynamic forces shape and  reshape the competitive landscape constantly, how would the future  look? Would  the word  'offshore'  be still relevant? As IT  services become commoditized, what type of services will IT service providers offer? While it is never easy to predict future trends, there  are a few macro trends that are just blossoming out, and which I believe will form some of the core characteristics of outsourcing business models or engagements in the future.

Trend #1: Virtualization of services
As the forces of globalization sweep unhindered across nations, consumers of services will not worry too much about where their support is coming from. Services will be ‘virtual’, which means that tasks can be done anywhere, using the right combination of skills and costs. The word ‘offshore’ with respect to outsourcing may lose its relevance, and a more appropriate word, such as ‘Effective Sourcing’ or ‘Virtual Sourcing’ may take its place. Service providers who have presence in multiple geographies, and are nimble and flexible to deliver high quality blended services at competitive costs, will have a distinct competitive edge over the others.

Trend #2: Emergence of automated self-service platforms
While the first wave of outsourcing saw labor centric services such as application development, maintenance and monitoring moving to offshore locations, the next wave will see an accelerated automation of labor centric services such as testing and development. Automated self-service platforms will emerge, allowing customers to use the platforms of service providers for their internal needs.
Customers will have the option of creating their own tasks on these self-service platforms, and monitor them using sophisticated tools provided by service providers. For example, a customer may use a  hosted testing platform  from a service provider  to  test its own application. The service provider will differentiate itself by giving the customer access to a huge repository of test cases and best practices for testing its  application. This is in addition to the cost savings that the customer can gain from savings due to license related costs.
Similarly, a customer may use a platform of a service provider to centralize processes, and apply common standards and rules to ensure consistent practices across global locations. Once  customers start  using such platforms,  they can  apply automated  workflow technologies to enforce enterprise policies.

Trend #3:  Frameworks on sale
In the current IT services model, there exists a linearity between manpower and revenue growth. As wages increase at a fast clip, IT service providers will be forced to improve productivity and revenues per employee. In addition, IT service providers will face new challenges such as rapid automation of labor-centric services such as testing and development.

In such a scenario, the traditional labor-intensive IT model will not suffice, and IT service providers will have to differentiate by offering frameworks or processes that automate repetitive tasks. Frameworks could also be offered for setting up a new manufacturing operation in a new country or building a new car from concept to design to factory floor layout. An example of such a framework is Patni’s framework for ‘Moving offshore manufacturing to Low cost Countries’, which allows even small and medium manufacturers effectively setup or migrate their manufacturing operations to low cost countries. Going forward, frameworks will be the norm rather than the exception. Services will be bundled or offered around frameworks, allowing IT service providers to differentiate themselves in a world where IT services will increasingly get more and more commoditized.

Trend #4:  Success linked billing models
As margins get squeezed due to rising wages, IT service providers will experiment with flexible models that ensure that prices of contracts are structured and based on actual success rates achieved. For example, in the future, IT service providers who are confident of their domain expertise and executional excellence will take contracts where billing rates will be linked to the actual reduction in the total cost of ownership for a particular process, or the level of efficiencies achieved.

This will be a significant shift from the traditional FTE model, and give players a chance to demonstrate their capabilities and differentiate themselves. This model creates a win-win situation for both the service provider and the client. Unlike the traditional model where financial stakes are retained by the client, in this model, the financial stakes and risks are shared with the service provider. The focus will be on providing value to the client, rather than the familiar volume based cost arbitrage model offered by all service providers.