Outsourcing Times

Indian Firms Overvalued, but Poised for Growth

A recent study indicates that Indian Outsourcing Companies are quickly climbing the services added ladder and are beginning to compete with traditional western business service providers.  Consultancy firm Katzenbach partners indicates that the relative value of growth of these companies is much higher than with traditional service providers.  That means, that for every dollar of profit earned, the fluctuation in the price of the stock moves considerably relative to western competitors. 

This is normally a characteristic of an overinflated stock.  That may be the case with players like Wipro, Tata Consultancy and Infosys.  However, on the other hand, this means that as the earnings of these companies increase, the multiple of the stock price will increase radically.  As most Indian firms are concerned primarily with increasing market share, and are not as concerned with quarterly earnings reports or managing legacy costs, these stocks may be a good investment in the future.  At the present, however, it appears that many people are already betting on high growth, and that as such, the growth of the stock price may slow in the near future. Gulf Times reports:

"The best of the Indian outsourcing companies derive 80-85% of their market capitalisation from investor growth expectations," said Nathaniel J Mass, a senior fellow with the New York-based Katzenbach Partners.

Read More: Indian tech majors to top outsourcing

Keane Inc. Names Internal Hire as New Indian Head

A leading business and information technology services firm, Keane Inc. announced yesterday that it has named Sukany Srivastava as the managing director of its Indian arm.  The company has indicated that the move will not drastically change the direction of the Indian branch of the company, stating that it will continue to expand its centers in Gurgaon, Noida and Hyperbad.  The company currently offers outsourcing solutions primarily to western nations interested in achieving cost savings by tapping into the cheap labor available to them in India through Keane.  Srivastava is an internal hire, meaning that the company is unlikely to make any drastic moves in the future.  On a larger scope, this gives some indication that large outsourcing firms are satisfied with margins achievable through their current business model.  This comes in direct contrast to what some analysts have been reporting about the desperately shrinking margins of offshore outsourcing firms, and the need to make radical changes in their business models. Forbes.com reports:

"Sukant has outstanding credentials in delivering strong client solutions that utilize a global delivery model and has deep expereince in balancing the sales and delivery aspects of outsourcing engagements," said Shaw. 

Read More: Keane Appoints Sukant Srivastava as Managing Director of Keane India

Regions Bank Sells off Strategic Outsourcing Inc. in Ironic Move

In somewhat of an ironic move, Alabama-based Regions, a US regional bank, has announced that it will sell its majority stake in Strategic Outsourcing Inc.  to focus on its core business.  What is amusing about the move, is that Regions rationale for getting out of the Outsourcing game, is the same reasoning many companies use to enter the fray.  What it potentially indicates, is that while outsourcing on an individual company level can be a means of strategically limiting the focus and energies of a firm, on a larger scale, managing an outsourcing service provider can be more work than its worth.  This sale may simply be an isolated event.  If other western outsourcing destination firms follow suit, however, it may be an indication that at least for western companies, the margins on outsourcing are becoming too small to sustain major players.  This will initially spell a shift in more outsourcing work to offshore outsourcing destinations, such as China and India, but will ultimately move on to yet cheaper and less developed nations. Reuters.com reports:

Jackson Moore, Regions' chief executive, said the sale will help the bank focus on businesses it considers core.  Regions has been trying to control costs since merging in July 2004 with Union Planters Corp.

Read More: Regions Fin'l sells outsourcing stake for $70 mln

Transformational Outsourcing: Here to Stay?

Companies are using outsourcing in bold new ways seeking big rewards. But before seeing the benefits, outsourcing client management must forsake conventional wisdom and set up performance management processes that may feel counterintuitive.

Outsourcing isn't what it used to be. When executives began outsourcing substantial portions of their operations more than a decade ago, they did it to off-load non-core activities that distracted them from their real core business agenda.

That is now fast changing. Business leaders are now using outsourcing in dramatic new ways for bold new purposes: to facilitate rapid organizational change, to launch new strategies, and to achieve a quantum change in the business processes. This is transformational outsourcing. With it, managers aim to dramatically improve a company's current performance and future competitive ability.

So what is transformational sourcing? Is it something new or another passing fad?
The theory behind transformational sourcing is clear. Traditional outsourcing involved transferring an existing function or process (such as maintenance, IT infrastructure or call handling) to a third party who either used the current staff and assets to provide the service onshore, or its own staff and assets to provide the service offshore. Whether the service was onshore or offshore, the end result was that the outsourcing client company received a very similar service back from the provider. There might have been some cost savings and many companies also used outsourcing or offshoring to trim staff costs and unwanted assets. However, the cost savings were not dramatic and there were rarely substantial service improvements. In addition, managing a third-party
outsourcer was often time consuming and merely distracted management from dealing with the problems facing the industry. The transformational model is different. It aims to re-engineer a process or function so that both the performance improves and the cost decreases. Transformational outsourcing aims to change the traditional outsourcing paradigm that says if you outsource a problem you do not get rid of the problem.

Let us consider how a company planning on outsourcing its call center operations
can reap the benefits of transformation outsourcing. The opportunity offered by
redesigning and rethinking of call flows while outsourcing call center operations
is big but easy thing to overlook. The outsourcing clients must take a hard look
at the business processes embodied in these call flows to achieve a dramatically
new and improved business advantage.

Service differentiation and go-to-market propositions built around
transformational outsourcing will enable service providers to win new business in a
growing market where an increasing number of clients are looking into call
center outsourcing. Transformational Outsourcing seems to be a safe bet going forward and might be the difference between a painful outsourcing experiment and a
successful and rewarding experience.

--This article was written by guest author Shankar Sahai

Sarbanes-Oxley Drives Work to Outsourcers, but Problems Still Linger

Accounting and financial disclosure firms around the world are benefitting from Sarbanes-Oxley's rigorous requirements.  Companies across the United States are deciding to outsource the arduous task of ensuring compliance with the bill rather than attempting to do it themselves.  This has meant jumps in profits as large as 35 percent from firms like India's Infosys.  Despite this rapid increase in business, however, outsourcing companies still face a hige challenge in maintaining their profitability edge.  First and foremost among these is turnover.  In some companies turnover exceeds 70 percent meaning that transition costs run high and the quality of work is lower than it should be.  The turnover is an indication of the increasing competition for labor, whose scarcity is driving up wages and eliminating much of the initial rationale for entering into outsourcing in the first place. CRM News reports:

Selling the end-to-end solution and getting the least risky processes as business.  This is the most challenging aspect of their collective long-term business models. 

Read More: Outsourcing's Double-Edged Sword: Trust

MiFID (Markets in Financial Instruments Directive) will Lead to Finacial Mergers

An anticipated wave of European banking regulation is anticipated to force many smaller financial services companies to shift compliance regulations to outsourcing firms.  MiFID (Markets in Financial Instruments Directive) will create, in theory, a single European capital market that will apply to all 25 EU states by April of 2007. 

Initial estimates indicate, however, that the regulation requirements to make the shift will cost financial services organizations an estimated 1 billion euros.  This will place increasing pressure on the margins of financial services companies, and force many to reinvent themselves.  The high costs and universality of the move will also likely cause a sharp increase in consolidations and mergers between small and mid-sized investment banks.  This will allow many such banks to achieve economies of scale and help them remain competitive in the changing financial market.  Silicon.com reports:

It predicts increased demand for outsourcing and application service provider (ASP services to enable smaller participants to cope with the new regulatory requirements and the complex market structures that follow.

Read More: IT Outsourcing: Wave of Euro-regulation to spark outsourcing

Erroneous Study Denounces Importance of Outsourcing

A recent study reveals what we all already know, that outsourcing alone is not sufficient to sustain an ailing business.  The report was conducted by the Center for Automotive Research which concludes that managers feel that proper execution of business basics such as developing innovative products and customer service are far more important that cheap labor. 

This is a fantastic example of a useless survey.  Of course people will feel as though developing a good product and marketing it effectively is more important to their success than cost cutting.  But that's not the issue.  The issue is whether in today's competitive global marketplace a company can survive solely by producing a good product and marketing it effectively.  As far as this author is concerned, the answer far more often than not is, no.  A company must constantly embrace cost cutting because the value placed on quality does not compensate for the higher labor costs necessary to achieve such quality.  Rather, there exists a floor above which all products are considered virtually equivalent.  The key is to reach that floor by spending as little as possible and avoiding all legacy costs.  This, almost by necessity, means more outsourcing. Forbes.com reports:

For instance, when executives were asked to rank a variety of factors on a scale of 1 to 5 in terms of their impact on the companies' long-term future success, "developing engineering and intellectual property unique to their firm" was ranked number one.  Somewhat less important were "pursuing increased engineering and design responsibility" and "optimizing (their) supply chain," with mergers and acquisitions, and outsourcing ranked last.

Read More: Major US Auto Suppliers See Execution of 'Business Basics' as Key to Their Future Success

GKL PLC Announces Major Layoffs in Outsourcing Move

In what seems to be a global epidemic among automotive and aerospace companies, GKL PLC has announced it will eliminate 2,500 jobs at its U.S. and French manufacturing plants.  The company plans to outsource the work to firms based in Latin America and Eastern Europe.  This move is part of a larger company plan to increase output in low labor cost areas while eliminating much of their workforce in first world nations.  This strategy was made clear by a company report that indicated it planned to increase the production of transmission components by 70 percent in Mexico and 40 in Brazil by 2007, while simultaneously doubling production from existing plants in Poland and Slovakia.  What is interesting about the move is not that the company is planning to allocate its labor in a more cost efficient manner, but the fact that the company is being so straightforward about the move.  One could interpret this as an indication that the backlash against outsourcing is waning, but I think a more appropriate rationale is the shield offered GKN PLC by the industry it is involved in.  With automotive firms throughout the western world struggling to achieve profitability, the general public has shifted to support the firms rather than simply their labor. MENAFN.com reports:

GKN recently announced the colusre of two U.S. plants and said Thursday it was thinking of closing a Florange, France, facility.

Read More: GKN outsourcing 2,500 jobs

Finding and Selling your personal Outsourcing Services

A recent report by MSNBC outlines the various ways in which individuals can market themselves online to first world employers.  By the same token it outlines some ways in which individuals in need of programming or freelance work can find and contact individuals located in India and China to contract out that work. 

The article covers websites like Contracted Work, Guru.com and Elance Online, each of which charge users a middleman fee to connect service providers with employers on an individual basis.  For Indian technicians, the article recommends creating a website to showcase your abilities, while for employers it recommends signing up with these services.

The reality, however, is that there is no need to pay such middlemen.  There are a number of free, yes free, sites that connect individuals in need of projects done and literally thousands of potential contract employees.  Do these pay per use sites make the process simpler, potentially.  But in my experience it has been quite a simple task to find employees in just a few minutes by scouring the web. MSNBC reports:

But before you sign up and pay for this service, shop around.  Contact the sites you're interested in, ask to speak to other graphic designers who list there and see what they have to say about the reliability of leads.

Read More: How to ride the global outsourcing wave

TPO Survey Reveals Executives Educated and Gung Ho about Outsourcing

According to a recent report by TPI, the offshore outsourcing market is ripe for sudden growth.  The report studied the results of 100 senior UK executives regarding their interest in expanding their offshore outsourcing operations.  A full 81 percent of respondents indicated that they planned to increase expenditures and energies in outsourcing while a mere 4 percent said they planned to decrease.  While these types of surveys have been rather common in recent years, and do not necessarily corrolate with a sharp increase in outsourcing expenditures, the overwhelming numbers here do indicate a strong potential for growth. 

In the past, these surveys carried less weight because many executives reported fondly about plans for outsourcing, but had little intimate knowledge of the costs and how to go about such a move.  This report, by contrast, also asked respondents about their knowledge of offshore outsourcing, and found that the vast majority were well aware of the conditions of outsourcing but were nonetheless interested in pursuing the matter. Managing Information News reports:

Our survey results clearly indicate that there is very little disillustionment with offshore outsourcing.  What we can ovserve, however, is a general shift towards more sophisticated sourcing strategies as the global sourcing market comes of age.

Read More: Offshore Outsourcing Set For Continued Growth, According To Report