Outsourcing in Economic Crisis– A rebirth or back to its roots ?
March 26th, 2009
I recently read an article on the Times website ( LINK) which made me think about the outsourcing industry and where it is now. The Times article talks about the implications of the recent press release about IBM laying off people in the US and shifting some of those jobs to India. As I had mentioned in my post earlier Accenture, Deloitte and similar advisory, consulting firms are doing the same although on a more muted basis so it is hard to single out IBM.
I believe that the recent news and the underlying trend on outsourcing is less about a rebirth but coming about a full circle on where the outsourcing services industry started – cheap workforce.
No longer it is about going up the value chain, innovating using global workforce or anything which sounds like a ‘consultant speak’. It is back to basics and is about cost and survival.
The outsourcing deals being done today and for the foreseeable future are going to be about just that for corporate – reduce their budgets, look for cheap deals to manage cost. It is no different in a number of ways then what consumers do during these tough times – reduce their budget, look for cheap deals, bargains. The added challenge which the corporates have is that unlike a consumer they have a responsibility to not only their shareholders but their employees and customers and now the politicians.Corporates also have the social responsibility to the community where they exist and do business which again in today’s environment presents them with conflicting goals of managing cost and keeping jobs.
Past
Outsourcing industry started with the concept of availability of cheap and skilled workforce which could now be with the new connected world delivered and received seamlessly anywhere. There was an educated workforce at a price point available in India, Philippines and the companies looking to manage cost started experimenting with using global workforce. That resulted in a boom within these countries and the industry started to mature and grow. For the Indian companies which had send folks in drove to ‘FIX’ the Y2K bug this became an opportunity to leverage the folks back home and build companies which operate out of low cost locations and can deliver anywhere in the world.
Companies in India grew as people start accepting the talent pool and delivery capability of India based firms and starting giving more work to save cost.
A number of US based firms like Accenture, IBM, Deloitte and other started setting up operating centers in India which grew very aggressively to support the growth within these firms globally. Firms like Microsoft, Oracle setup development centers in India and some like Dell set up captives to provide help desk supports. Firms like WNS, Genpact evolved from captives setup by the early pioneers like British Airways, GE and became stand alone entities.
Recent Past – The ‘__O’ phase
Over the last 8 to 10 years the industry matured or seemingly so as the growth cycle in the US and Europe continues to fuel need for resources and companies became comfortable with global workforce.
We had all possible ‘___O’ lexicon evolve.
IT outsourcing (ITO), Business Process Outsourcing (BPO), Knowledge Process Outsourcing (KPO) , Legal Process Outsourcing (LPO) , Recruitment Process Outsourcing (RPO) and a number of other terms, some exotic continued to be coined as niche value added solution. Mantras such as ‘They came for cost but stayed for quality’ were industry quotes used by pundits to showcase the value added abilities of the industry. Firms talked about going up the value chain, being the back office for high end work, producing research reports and high end analytical work for investment banks. Every firm wanted to exit out of the low end of the business – call centers and move on to do high end work.
These were heady times and with the growth of emerging country economies everything appeared to be heading up. Outsourcing firms grew at rates of 30% plus. Outsourcing companies reported the growth in their employee Quarter over Quarter as a badge of honor. There was a race to grow faster and keep pace with the projected demands.
Norms such as providing transportation, entertainment, trip to far off lands, and yes salsa lessons to hold on to employees became the norm of the day. Working night shifts became acceptable in a conservative society and so did the business for Tata Sumo, which became the ride for the ‘nightriders’.
The growth also fueled the growth of domestic real estate and economies. The mall culture in Gurgaon, the real estate boom in Hyderabad, Bangalore, Chennai were all supported by the growth in consumers who were now globally brand aware, had higher salaries ( relative to Indian markets) and were willing to spend as if there was no tomorrow. Buying a house in Gurgaon as an investment property and making a double digit return on properties became fashionable as the cost of affording a house to live in the same city became prohibitive.
The infrastructure continued to lag ( and still does) but that was not a concern to the growth of the industry. ‘Client visits’ to locations in India contrasted the shoddy condition of the infrastructure to the ‘six sigma’ process and quality blackbelts within the confines of the office space to improve processes thousands of miles away.
Along with the growth did come some dark shades. Attrition in Indian firms shot up to sometimes as much as 40%. Employees would demand and leave for a $100 dollars a year salary increase. HR became a pipeline management job vs resource management . Unusual benefits and abnormal salary demands became the norm. Companies doing business with firms in India would demand and include attrition as a measurement tool and penalize firms if they could not manage attrition as Indian firms dealt with ever growing demands of employees..
A person with two year experience was not a qualified manager, compared to say a person with ten years experience in the US. A person who had worked on two projects in a domain became a Subject Matter Expert . Quality of delivery suffered because you had some uneven match of client facing teams, skill set and expectations.
A number of firms running call centers out of India migrated them either back in house or moved them to other locations where accent and customer service was perceived to be better than India.
None of this though deterred the growth and the industry continued to grow, until unknowingly the outsourcing of services to emerging markets also started exporting it’s latest – the economy crisis!
Immediate Past
When the downturn in the US economy and the housing crisis started, the outsourcing firms remained ‘cautiously optimistic’. A number of the firms even looked at this as a potential opportunity as the assumption was that firms will start outsourcing more and will continue to fuel the growth of firms offshore. There were a few hits earlier where firms such as IndyMac, WNS which were in the Mortgage Process Outsourcing (MPO) business got hit but the industry looked at that as a minor blip and brush aside that things could go more down.
As the crisis deepened the US firms starting failing, filing bankruptcies and disappearing all together. There was still a sliver of optimism in the firms but outsourcing firms turned the cautiously optimistic guidelines to earning slowdown warnings.
Companies in the US struggling to stay in business, focused on core competencies and decisions about to outsource and offshore were all put on the backburner. The decision making process within firms started getting stretched. A number of the ‘bleeding edge’ firms aka the Wall Street firms which were big in offshoring and outsourcing went bankrupt or were merged into a larger entity. Fate of the operations and employees of such firm uncertain during the chaotic times. A number of the employees of these firms in India realized that they had no place to go where till an year back they could not get recruiters to get off their back and deal with their every request.
With the crisis continuing to deepen , the government in US and other developed countries took to bailing the firms out. That started adding a whole new dimension and a demanding task master to the mix.
During these time the earning of the outsourcing services firms continues to struggle. No longer was the headcount growth a badge of honor. Firms told analyst that they will not be using this metrics going forward. They want to do more with less or same number of people. Layoffs – unheard of or only heard about on US related websites suddenly came to shore. News about Satyam laying off people ( to now being a corporate fraud poster child) , to firms holding of on new hiring and hiring slowdown from school all came together. Jet Airways in an unrelated industry but a growth industry, laid of people which caused an uproar in the Indian political scene and the company was forced to withdraw those layoffs. Talk about Politics in Corporate – Lesson for the US – maybe , maybe not! (LINK)
The market had over this time period shifted to an employer market from an employee market. No longer were people demanding a premium to move. People were willing to accept a security in job vs a premium in a new job.
Cost cutting within vendors became a necessity. Infosys was sending emails out to it’s employee to save $10 dollar per employee. Companies were restructuring or changing onshore/offshore mix to save cost. A number of the firms recalled their Vendors which promised cost saving to corporates across the world had to swallow the same pill to survive.
The fact that the currency weakening and hedging within firms continued to follow a fickle market did not help too.
A number of the outsourcing firms saw their share value plunge in India and other stock markets.
Then to add to it Mr. Raju at Satyam decided to ‘come clean’ and show his house of cards. Doing business with Indian firms all of a sudden became riskier than ever.
Smaller firms specially hurt and a number of them will not recover from that blow.
Present and Future
The news in the US continues to be grim. Jobless rates are high and experienced, well educated people have seen their jobs disappear with little new opportunities to look forward too. Government is trying hard and thrashing their arms in all directions to row the boat in the right direction but the affect if any could take years to show. In the meantime the jobs continue to disappear and new job creation is limited.
The consulting firms like the IBM, Accentures of the world have seen their dealflow slowdown and clients not willing to commit to ‘scope increases’ or future business.
Getting newer clients is harder if not impossible and those coming in are demanding a price point. Existing clients getting back to the drawing board and negotiating rates down.
Decision making is slow and has hurt all firms local or offshore. The larger consulting firms are looking to rebalance their operating model aka move jobs from higher cost locations to lower cost locations to survive. The outsourcing firms have basically frozen hiring and are recalling their onshore folks back to home base to manage cost.
With Government the owner of a number of these troubled companies, questions about outsourcing when a firm receives bailout money will continue to challenge the corporates along with their basic survival during a downtime. The corporates now with bailout money have realized the devil in details and have to report to another task master.
The outsourcing decision making process today has gone back to where it all started. It is today about cost with the added risk of survival and public perception.
A number of decision makers we speak with today on outsourcing are looking at it purely from a cost and survival perspective. No one speaks about innovation, process improvement , higher value added work. It is back to dollars and cents. Seems like for the foreseeable future that will be the only lense people will look through to evaluate outsourcing.
I think that the cost saving decision making process today though within firms has to look at all possibilities and not solely outsourcing to a remote location. Yes it is an option but not the only one.
To continue to support communities in these chaotic time and to balance that with their own survival will be a challenge which corporates have to face now and in the near future. Politics and Government intervention muddles up the decision making process and Globalization make it harder. Globalization is not going away but neither is it moving to a seamlessly connected corporate structure operating globally anytime soon.
Mohit Sharma is the CEO of Corrystone Global Partners. Corrystone is an outsourcing consulting firm providing benchmarking, operational risk compliance, operational audit and transition management services to companies with operations in US and India. We work with firms which are exploring India or low cost US locations for IT, Business Process work and or have established IT/operations in India and US and are looking at ways to further optimize cost and manage operational risk.
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