The ‘Value’ Paradigm Shift in Offshoring and Outsourcing
The origins of the ITES offshoring industry in India can be traced back to the Y2K opportunity, back in the mid-1990s. In the following years, many captives and service providers emerged that capitalized on skills shortage and high labor arbitrage. Industry growth has spiked over the past two and a half decades, and has helped launch many successful careers. While the growth, albeit a bit tepid, continues, there is a fundamental question facing the industry today before it takes the next big leap or plateaus out.
“What is the value?” is the key question that keeps leaders in the offshoring and outsourcing industry up at night. This is true of captives and service provider organizations in equal measure. Clients, including internal ones, are now more informed and better aware of the spectrum of choices available to them, and are under immense pressure to optimize their spend budgets. This in turn is driving them to ask the pertinent value question not only during the renewal stage but also at the time of receiving proposals for any new work. It is a far cry from the early decades of outsourcing and offshoring, where mere labor arbitrage was enough to have large deals signed and renewed. This article looks to study this metamorphosis and understand ways in which captives and service providers are looking to table value.
Before we contextualize how captives and service providers look at value, there is merit in defining “value” and understanding why this concept is gaining traction. The dictionary defines value as the ‘relative worth, utility, or importance’ of something. A few weeks ago, I met the head of the India captive of a travel-based Fortune 500 firm. I liked the way he put it – he said that he explains the concept of value to his team using the following example: if it costs you X to deliver something offshore that would have otherwise cost the parent organization 4X in a different onshore location, it is traditional labour arbitrage. However, he says, the true value is if the impact of what you deliver on the top or bottom line is, say, 20X. One can argue that the multiples used to drive home the point are unrealistically high to be used consistently, but it does somewhat help simplify the concept.
The main objective of the value approach vs. the traditional headcount and utilization approach to offshoring is to drive a mind-set change, i.e., from thinking scale and labour arbitrage to thinking ROI. Further, it helps offshore entities sync up with the parent/client organization’s strategic priorities and work towards delivering ROI along the same goals. While true value lies in the eye of the beholder (client/parent organization), its honest interpretation (with limited creative liberties) puts a stake in the ground that facilitates a dialogue that traditionally was seldom possible. This dialogue is much more powerful and can enable offshore captives and service providers to get a seat at the decision-making table, which has remained elusive in most cases.
Three drivers make value the most discussed and debated topic in senior leadership meetings or even boardrooms of offshore centres/ outsourcing firms. First, the extent of labour arbitrage that existed a few decades ago is fast dwindling. Economies in Asia and Eastern Europe have been witnessing a fast-paced double-digit wage inflation, compared with early single-digit (in some cases even negative) wage inflation in developed markets. While there are jobs, especially for skilled personnel, in highly coveted domains such as data science where the arbitrage is still substantial, there is growing recognition that it will substantially reduce in the coming years, driven by spiralling wage inflation. Second, there is a growing nationalist sentiment across the global political landscape. This puts more pressure on large established companies to place more jobs in their home country (and in some cases, even think about moving back). Needless to say, while offshoring continues for commercial interests, political sentiment forces companies to be more strategic about what to outsource, and that’s where value delivered becomes a strategic differentiator between one captive site and another (or one service provider and another, or even a captive site and a service provider). Third, the emergence of multiple fulfilment options – both in terms of offshoring and outsourcing destinations, as well as service providers/captives – means that various entities are competing for every additional dollar of offshoring and outsourcing work. Getting a share of the pie therefore requires pitching value creation.
Value is fast becoming the single-most important metric on the quarterly scorecard for offshore engagements. It’s not uncommon for the senior leadership at captives to brainstorm about what additional value can be shown for this year vs. the past year. For this reason, most mature captives have institutionalized an innovation and ideation program, and the person running this program typically reports directly to the site/country head. Enclosed below are, in order of increasing perceived value (as gleaned from discussions with senior leaders in the industry), heads under which captive organizations articulate value:
1. Process Innovation – Process innovation to enhance customer experience and thus positively impact revenues OR cost reduction through automation/process simplification. The value can be articulated in terms of impact on customer ratings/scores; reduction in processing and waiting time for customers, cost reduction through process step elimination, etc. While this has remained the norm since the early days of offshoring, what’s changed in recent years is the expected pace and size of savings/revenue growth impact.
For instance, a couple of years ago the India captive of a global ride app firm completely automated (through algorithms) a process within a few months of it being offshored. This sort of thing was previously unheard of, as the main play in captives centered on building scale. However, new-age companies are more open to such disruptions, as they aren’t constrained by status quo.
2. Function/Process/Capability Penetration – This typically refers to the proportion of work for a particular function/process/capability that is handled at the offshore site. The higher the percentage, the better it is as it showcases greater ownership in running a function end to end, and helps establish the captive center’s value as a strategic arm rather than a transactional labor arbitrage.
Example: Captive arms of several US-based financial services and banking firms deliver a majority of the FP&A and risk processes in-house. The value here is articulated in terms of uniformly faster processing times, quantified in terms of savings through better financial planning/working capital management, etc. In the latter example, it can be about the total value of potential risk identified, and action taken to mitigate it.
A number of US-based retailers and CPG companies run, in full or in large parts, their marketing and sales analytics functions from their Bangalore captive centers. The value in this case is showcased in terms of quantifying new PoCs, which in turn can help move the needle on the top line (through promotions optimization, better sales force deployment, etc.) or cost reduction (through workforce or store optimization, etc.).
3. Talent Pool Supply – For a lot of captives, supply of high-caliber talent to the parent organization is also looked at as a potential value lever. This can happen in two ways – one, by having a flexible that can relocate and take up strategic roles onshore, and two, by relocating business ownership of strategic roles to the offshore site.
As an example, the India-based captive of a top 10 global pharma company has shifted several procurement category head roles in India, which were traditionally based in Europe and the US).
Equally, the India-based captive of a multi-billion dollar financial services firm has offshored many global roles. In addition, the firm sources and tracks talent sourced from its offshore captive center for key onshore roles.
4. Thought Leadership and Patents – Patents and thought leadership are pivotal and a direct source of value creation. It’s not uncommon to hear about patents filed by offshore captives, especially those where the parent organization views the captive as an extended team and therefore shares the requisite business context. The patent process is a long and tedious (spanning several months and sometimes even a year) stage gate process, and often requires legal and drafting support.
5. Product/service innovation – The key value creation opportunity that mature, best-in-class offshore captives have is to come up with and pilot new business ideas or product/service innovation that would be difficult to achieve in the parent organization. These ideas typically sit at the intersection of multiple business units/functions, and are often lost in the silos that exist in the parent organization.
Mature offshore captive centers operate as microcosms of their parent organizations, and can bring in cross-business teams, people, and data to blend with a partner ecosystem of service providers and start-ups to look at the bigger picture. This is the holy grail of new ideas and break through innovation. However, achieving this and requires unrelenting pursuit and deliberate nurturing.
If we switch tracks and talk about service providers, a lot of what we have said above continues to be relevant; though outsourcing service providers face the added challenge of acquiring the relevant business context, domain knowledge and data.
From the perspective of the service provider, the focus typically remains more on #1 (Process Innovation), #2 (Process and Capability Penetration) and to a limited extent, on #4 (Thought Leadership and Patents). However, in 10% of the cases (though this proportion is much higher in case of analytics and market intelligence work), on the back of cost savings, efficiency, and risk mitigation achieved, there is an opportunity for service providers to play along for #3 (Talent Pool Supply), as well #5 (Product/Service innovation). For this to materialize, the service provider needs to be deeply embedded, including on-site, with the client and work as an extension of its team. This is easier to achieve in companies that have experience in offshoring and outsourcing, and have a more open mindset to driving value through collaboration. There are a couple of areas where service providers are better positioned. First, they can adopt best practices and benchmarking from similar companies (as the client being serviced) w.r.t. a particular process/capability. Clients truly value this perspective. Second, service providers can at times bring together a much larger spectrum of capabilities that can be quickly scaled to make magic happen; this can sometimes be a constraint with in-house captives.
While the value concept continues to gain momentum and its robust articulation is critical for the growth of offshoring and outsourcing centers, it is worth mentioning that there is more talk than action. While we are well on our way toward offshoring, few captives and service providers are true flag bearers, while several organizations, including some captives of Fortune 500 companies and marquee service providers make a lot of noise about value but there’s a little engine under the hood. These companies tend to take excessive creative liberties in articulating value by including small automations and template usage under “value”. Needless to say, the writing could be on the wall for these entities in a few years as the industry surges ahead, solving the value conundrum.
