It is believed that over 19% of U.S. businesses now have some offshore outsourcing strategy, but within the Fortune 1000, it is a whopping 95%! Global outsourcing providers such as Accenture, CSC, EDS, HP, and IBM are obviously taking a major chunk of this business, but they are coming under pressure from the smaller players. Their percentage of the pie is reducing. However, large outsourcing dealssuch as the recent General Motors deal for over $7 billion go to the global giants named above. Nearly $100 billion of major commercial outsourcing agreements are coming up for renewal in 2006 and 2007.

Global sourcingthe use of workforce from anywhere in the world outside of the U.S. was once a strategy only of the IT sector. Today, outsourcing is not restricted only to IT and non-core activities anymore. It is expanding into business processes and core activities like design, R&D, and intellectual property (IP) creation. The key to survival is to adapt to it. As with any significant change, this evolution will abound with both challenges and opportunities for the organizations and their work force.

What should businesses do?

Organizations must focus intently on their core businesswhether that business is manufacturing, software development, banking, or financeand on marketing and developing customer-centric solutions for that business. For companies to effectively adopt global sourcing, they must identify the areas of their business that global resources can perform and then focus internal resources on the areas that elicit the highest value.

Organizations are turning to external suppliers for outsourcing everything from payroll processing to facilities management. The goal is better quality at lower costs, but too often the outsourcing results are disappointing to dismalsimply because many buyers lack a clear outsourcing methodology.

Using the outsourcing concepts listed below, managers responsible for outsourcing will learn to avoid typical pitfalls and ensure success.

• Plan and initiate outsourcingUse best practices for evaluating and selecting a service provider and for negotiating and renegotiating service contracts.
• Manage existing outsourcingUse governance and organizational models for managing outsourcing. Create business-value service-level agreements (SLAs).
• Manage financial/cost aspects of outsourcingUse known sourcing strategies, select the right vendor, and address sourcing-related HR issues.
• Manage the four phases of the sourcing cycleBe diligent about managing the sourcing cycle phases: sourcing strategy, evaluation and selection, contract development, and sourcing management.

Benefits

There are some good reasons for an organization to choose outsourcing. The key elements of the benefits are to enhance effectiveness by focusing on what you do best, to increase flexibility to meet changing business needs, and to improve operating performance. Other potential benefits should also be considered:

• Obtain skills, technology, or expertise not otherwise available within the organization.
• Improve risk management and agility.
• Improve management and control of operations and profitability.
• Improve credibility internally (within the organization) and externally (with suppliers, partners, customers, shareholders, investors, etc.).
• Reduce investments in assets.
• Generate cash for more-efficient operations and management.
• Accelerate expansion into newer markets, newer technology, and/or product range.
• Reduce costs and convert to variable costs, thereby improving profitability and shareholder value.

Levels

There are essentially three levels of outsourcing:

• Individual or project levelOutsourcing of individual activities, such as a project or a management or technical position
• Functional or program levelOutsourcing certain projects in a program
• Process or division levelOutsourcing the entire operations of a division

Various factors govern a customer's decision to outsource at a particular level:

• Critical nature of the workIf the work is critical to a company's core business, the company will prefer to outsource as little as possible and in discrete parts.
• Faith of the customer in a vendorThe higher the faith a customer has in its vendor, the more it will outsource. In some cases, it will outsource even the operations of an entire division.
• Cost advantageCost efficiency is an important deciding criterion, with larger work being outsourced if cost savings are large.
• Proven track record of the vendorA supplier's proven track record inculcates a feeling of trust, thereby inspiring the customer to outsource larger work to the vendor.

Destinations

Many consultants have released a ranking of the world's top outsourcing destinations. The preferred destination for IT, call center, and business process outsourcing is clearly India, with its cost advantage and qualified manpower base. India is followed by China, Malaysia, the Philippines, Singapore, and Thailand. The factors that these rankings are based on include infrastructure, skills availability and retention, access to a qualified pool of people, cost and quality of living, and political support. Other destinations include Central/South America, Ireland, Spain, Australia, and Eastern Europe.

Innovation

A fundamental transformation is happening today in the nature of any business. The importance of innovation cannot be over-emphasized. Innovation has to be creative, continual, and fast. With innovation becoming imperative to the growth of any organization, companies will need to continually innovate their outsourcing strategy and bring in newer models and methods. In fact, some companies are considering outsourcing the "innovation" that is required at their organizations to create competitive advantage and to stay ahead.

That is why outsourcing and innovation have now come together. The concept of outsourcing is increasingly used as a tool to assist innovation through providing information, procedures and business methodologies, new product development, and ongoing services. Outsourcing is the only business strategy available today that helps to inject new ideas, new perspectives, and the flexibility and agility required for success.

Innovate or Die

The real business solution to managing in this highly volatile, innovate-or-die Darwinian world is outsourcing. In an increasingly turbulent business environment, companies are focused on top-line growth, business innovation, and competitive advantageand it is therefore fair to expect their outsourcing partners to help them address the challenges.

Rajan Narayanan is currently a Senior Vice President at MindTree Consulting based at Bangalore, India. He heads the IBM Technology solutions group that focuses on mainframe and iSeries/System i. He is widely traveled and has been involved in offshore projects since 1985. He can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..