The Credit Crunch and Outsourcing
The recent tumult in the markets - and its reverberations from Wall Street to Main Street - have made the business news channels compulsive viewing for executives across the globe. One group of professionals that have been keeping a close eye on the day-to-day movements of the markets has been the Business Process Outsourcing (BPO) sector, especially in India. These BPO firms - and their progeny, the Knowledge Process Outsourcing (KPO) firm - have seen tremendous growth in recent years as Wall Street embraced their blend of high talent and low cost to outsource everything from software design and application development to equity research and financial modeling. The value delivered by this sector is undoubted but given the tectonic shifts occurring on wall street, it is inevitable that there would be some sort of impact on this growth story.
Indeed, a recent BusinessWeek article talked at length about the impact that the changing financial sector will have on info-tech spending and outsourcing in general - with some estimates suggesting a 15%-20% revenue impact by next year. While one can argue about the precise magnitude of the impact, there is no doubt that many firms (outsourcing or not) will feel the pinch given the unprecedented changes we have seen over the past few weeks.At the same time, it is important to not get carried away by the paranoia that has engulfed many of those around us. Experienced market watchers will point to one truism that has stood the test of time, and that is that everything goes in cycles. In this instance, we have just gone through a massive up cycle and the current economic climate will see, not so much a down cycle but perhaps a reversion to a more moderate growth trend for the medium term. (Long term, the potential is still huge.)
What is moderate growth? How long is the medium term? No two people will agree, but more important than arbitrary numbers are several core lessons that can be gleaned from the current environment:
Lesson 1: How many eggs and how many baskets?
In stocks as with customers, diversification is 75% of the path to success. The growth of outsourcing was driven by its rapid adoption by financial services firms, and understandably so. They had a defined need for these skills; they had the incentive to manage costs and; and they had a more progressive perspective towards outsourcing than many other business sectors (though this has also evolved over the years). Not surprisingly, the growth potential, the economics coupled with the entrepreneurial spirit led to the creation of an entire sector developed to service these needs. This is a good thing.
What isn’t good is the lemming-like rush that tends to follow supernormal growth - although economic purists would argue that this is needed, hence it is, in its own way, good. In chasing the holy grail, many organizations tend to develop a singular focus on one customer set - with the view that a small number of anchor clients will ensure long term viability. The more astute organizations, however, will have absorbed the lessons of our corporate forefathers and diversified their customer base beyond any given sector. And the recent issues in financial services - where storied names have disappeared overnight - only go to emphasize this point.
This is not to suggest in any way, that the sector is dead or anywhere close to it. Different, yes, but dead, no. What this does suggest is that if one’s goal is to build a consistent, viable long term business, it is critical to ensure that one spreads one’s risk beyond a given customer set, in the event that market-level shifts ‘change the game’.
Lesson 2: Don’t believe the hype
Recent weeks have seen a raft of articles and stories on the need to rethink outsourcing and offshoring. Inflation is rearing its head, wages have gone up, currencies have been fluctuating. Listen closely and the underlying message is that offshoring could be going by the wayside.
While this may be the case with certain commodities, the economics do not entirely apply to the realm of services outsourcing. The reality is that the labor arbitrage element - which is the fundamental underpinning of the industry - is still substantial and coupled with the talent available, is unlikely to change for the foreseeable future.
What’s more, the types and varieties of work being outsourced is progressing and changing as we speak. In the KPO sector, for example, which is the space that The Smart Cube plays in, organizations are not just outsourcing data collection and company profiles, but rather complex analyses such as predictive modeling and consumer insight generation, emerging market strategy research support and deal due diligence research.
While it is foreseeable that there will be a short term impact due to the current economic turmoil, in the longer term, the situation for outsourcing firms will only improve due to the fundamental economic and quality proposition.
Lesson 3: Changing the Competitive Dynamic
One other interesting point that the BW article raised was that offshore firms (whether in India or elsewhere) will face a changing competitive dynamic as global players begin to entrench themselves in India and offer up a global economic proposition to their clients.
I believe this is more an open question at this time rather than a certainty. The nature of large, multi-billion dollar organizations is that they have structure and protocols. There are deals that they will chase and those that they cannot. There are opportunities that fit in with their defined visions and financials targets (and public reporting requirements), and many that do not. The gaps that are left behind are the gaps that smaller, more entrepreneurial organizations excel at filling. They are nimble organizations that can flex to meet the client’s specific needs - both in terms of objectives and economics. To date, the large corporation that can react and act like a smaller outfit is the exception rather than the rule. As a result, mindset is as critical as global presence.