Outsourcing: New Business Model Emerges from Changing Market

Outsourcing across industries continues to grow and while one significant trend -- offshoring -- continues another model has developed -- multisourcing. According to recent surveys and research, outsourcing is "maturing" to a market wherein cost savings, while important, are not the sole motivator or benefit. This development has caused companies to reevaluate their outsourcing tactics and consider outsourcing functions traditionally deemed "core," such as innovation. It has also necessitated a more collaborative approach between outsourcer and provider.

PriceWaterhouseCoopers' (PwC) survey (which is not broken down by industry), "Outsourcing comes of age: The rise of collaborative partnering" says, "Our research confirms the growing complexity of outsourcing." Beginning with some basic numbers, PwC says that 76 percent of respondents cited lower costs as the top reason to outsource, but nearly the same amount -- 70 percent -- said to gain access to talent. Additional motivators include, farming out activities that others can do better, 63 percent; increasing business model flexibility, 56 percent; improving customer relationships, 42 percent; and developing new products or services/market segment expansion, 37 percent.

IT services are the most outsourced -- 57 percent -- with 53 percent outsourcing production or delivery of core products or services; 33 percent outsource sales and marketing; and 32 percent outsource innovation/R&D. The survey reveals that 27 to 56 percent of respondents intend to expand their current outsourcing initiatives in the next five years.

Interestingly, the top motivator is, in a way, also the top barrier to outsourcing, according to PwC -- proving the cost benefit. Forty-eight percent cited this along with lack of experience as obstacles, while 45 percent say the company favors using in-house employees; and 37 percent say lack of skills to manage outsourcing.

One-third of respondents said that every phase in the process is difficult, and nearly every one said there are difficulties in one or more of the phases. Ninety-one percent said they would outsource again, whether they were happy or not.

PwC identifies some "hot spots for growth" in outsourcing. In "large mature markets," procurement services, customer call centers and finance/accounting will be expanding; in "rising markets," customer call centers, core products and services and logistics and manufacturing.

OFFSHORING
Duke University along with Booz Allen Hamilton (BAH) published a 2006 survey report called, "Next Generation Offshoring: The Globalization of Innovation." The BAH report strictly refers to offshoring and says it is entering a new era, "The new generation of offshoring is about globalizing innovation activities that require high skilled personnel and about learning to access and manage talent globally."

As part of this trend the report explains that "where you offshore depends on what you offshore," with India being the "most preferred location across functions." China is emerging as the leader in procurement, though recent issues may change that. This country also claims the lead location for product development outsourcing, though U.S. companies tend to prefer India, Latin America and the Philippines for their high population of English speaking workers.

This survey breaks out analysis by industry and thus, gives a fairly clear picture of what consumer goods (CG) companies are doing. (To be noted, the following figures represent the survey category of "consumer and media.")

On top of IT functions, CG companies tend to offshore product design, citing "access to qualified personnel" and "differentiation strategy" as major drivers other than cost savings, which is reported at 32 percent. This is very significant for CG companies, as the study surmises, "Consumer . . . firms' offshoring of product design and engineering is particularly notable, given the tradition of holding on tight to these functions in this industry."

Overall findings note that "core" activities are being redefined and shifting from "unoffshoreable." The push here is greatly driven by a talent shortage, with a "declining number of MS and PhD graduates in science and engineering in industrialized nations." This is also influenced by high demand and cost of domestic talent and the retirement of baby boomers. Seventy percent of survey respondents cited "access to qualified personnel" as important or very important in the decision offshore.

Another contributing factor is competitive pressure. Sixty-seven percent deem competitive pressure important or very important in the decision to offshore, with 47 percent citing increasing speed to market. The study concludes that, "Companies are realizing that in order to remain competitive, they will have to drive the next wave of innovation by innovating globally."

A NEW MODEL
At the beginning of last year, Lance Travis of AMR Research in his report, "Outsourcing 2006: At the Tipping Point," noted that "companies are taking a best-of-breed approach to outsourcing." So rather than using one provider, companies are using multiple providers based on skill sets. In fact, recent research from Gartner and the aforementioned PwC survey shows that "multisourcing" is becoming the new outsourcing model.

Gartner analysts, Linda Cohen and Allie Young wrote a book called, "Multisourcing: Moving Beyond Outsourcing to Achieve Growth & Agility." They offer the following definition of the term: "the disciplined provisioning and blending of business and IT services from the optimal set of internal and external providers in the pursuit of business goals."

The authors indicate in the introduction that multisourcing will require a new approach, and regard their book as a road map to this new model. In it, they outline key themes as a "crash course" in multisourcing. CG