Friday, October 26, 2007

The third wave of outsourcing


Even as large global corporations transition to the second wave of outsourcing, the technology sector is heading towards the Third Wave in the making, according to The Hackett Group. The Third Wave, which would mean a transformation and scale up much different from the labour arbitrage market, would come up much faster than one anticipates and has the potential to challenge labour and cost arbitrage model. Some of the services providers in India and Eastern Europe could potentially find the going tough.

The President of The Hackett Group, Wayne M. Mincey, said, As offshore market matures, transformation and process improvement are likely to play a key role in business process sourcing decisions. The ability to provide transformational services and support provides a significant opportunity, and possibly the greatest threat that offshore markets like India will face in the coming 5 to 10 years.

Bigger savings

The findings of Hacketts research shows that while the potential for companies to reduce costs by offshoring back office operations is dramatic, companies can potentially increase these savings by over 50 per cent by selectively integrating process improvement capabilities into their globalisation initiatives.

Addressing a press conference here, the Chief Research Officer of The Hackett Group, Michel Janssen, said as opposed to Lift and Shift model where companies simply move current processes offshore, the emerging model seeks to transform the way services get delivered and has the potential to bring higher savings. These would be more so in the areas of finance functions, human resources and process related business.

Over the past five years, much of the first wave of offshoring has focussed on the low hanging fruit of basic transactional processes that could simply be moved offshore for labour arbitrage. But in the second wave, there is greater opportunity and the necessity to integrate transformation into offshore initiatives.

This is further complicated by rapidly increasing cost base after migration to the offshore market. Improvement of process, particularly related to transactions could bring about significant cost advantages, he explained.

The best way forward is to offer integrated transformation and process improvement. Offshore solutions would have to combine changes to the business process during and after offshore move to ensure higher value creation.