By all measures, the pace
of new outsourcing contract awards has slowed in 2007. The third quarter
reports are out any day now.
The paradox here is the
continued strength in the flow of work to India-led providers. You can see that
from the providers' earnings reports. My firm thinks clients are opting for
effort-based contracts - paying per worker per hour - rather than traditional
outsourcing relationships that specify the scope and quality of services.
Watch the news in the
coming weeks, and I'll bet you start to see a renewed emphasis on
productivity-based and outcome-oriented contracting. The provider
community has the expertise and the tools to deliver great value to clients
through real outsourcing, but they must surrender the old ways of selling
effort. They have to paint houses like pros.
That said, potential
purchasers of sourcing will likely be cynical about such quick cycles in
business models. Just as they were getting comfortable contracting for people
in low-cost destinations, the business model will change to reflect the rising
tide of labor costs influenced by currency exchange rates, taxation policies
and rising wages. The prospect of higher labor costs for effort-based
contracting won't be very appealing.
I expect outsourcing demand
to suffer from these shifts for a while, at least until we converge on a
sustainable business model that blends cost, capacity, and capability. That's
the model that will create long-term value.
