ARTICLES : THE CRESCENDO VIEW

So what do we make of companies either outsourcing or developing a strategy to outsource?

Corporate clients who are off-shoring, either moving jobs within the company or to a third party service provider in an overseas location, will continue to review and modify their existing model. Critics will point to several failed service models – Dell’s Service Center split being the most current. While businesses tend to set economic trends rather than lag to government policy, the public uproar created by outsourcing fueled by the media attention will force several large U.S.-based corporations – particularly within IT services and support – to review their current strategy. They will be doing this for two reasons: address building political pressures at the federal, state and local level and to ensure that whatever model is in place is in fact working. No CEO wants their name on the CNN screen crawl announcing a pullback of services from overseas. While the American consumer wants it better, cheaper, faster, we are also the first to say “I told you so. We knew that wouldn’t work.”

For companies that are developing their strategy, searching for answers through due diligence or just toying with the idea of outsourcing, the time has come to get in the game. Most companies have or will undertake a significant review of competitor practices and the marketplace at large for the latest trends. Still, better empirical data is needed. And, as Mr. Corbett notes, “The competitive advantage available in places like India, Philippines and Eastern Europe won’t last forever.” The gap between offshore and U.S. labor costs will eventually begin to close beginning in 2015. The time to decide where you stand on outsourcing is now.

U.S. corporations do have several permutations to consider besides moving jobs offshore. Near-shoring – moving jobs to locations such as Canada, The Caribbean or Mexico – is certainly an alternative especially for those companies that want to shed administrative or low-level production skills but are afraid a move to Eastern Europe, India, etc. may be too aggressive and capital intensive.

Another alternative that, in our view, will again become popular this year is the concept of on-shoring – moving jobs to low cost locations, either internally or to third party service providers, within the United States. This is the model being advocated by the Federal Reserve Bank as part of their business contingency / hot site plan resulting from the terrorist attacks of September 11, 2001.

This trend is not new. Most credit card processing facilities are in the upper Midwest. Several financial services firms have their customer service facilities in the Southeast. The auto industry has set-up shop in the Mid-South region. Being politically correct, corporations seeking to reduce their cost base and improve services can satisfy shareholders with high quality services, still at a reduced rate from corporate epicenters in the Northeast and West, while placating legislators ensuring goods and services will emanate from service centers within the U.S.

Whatever approach companies choose to pursue, public perception and political pressure will require companies to be nimble and well-planned in their approach. They will also require a robust communications and media strategy when it’s time to tell employees, shareholders and the media.

It is our view that outsourcing must be embraced conceptually and customized as a critical component of today’s business strategy for U.S.-based corporations. Those who embrace the strategy – using off-shoring, near-shoring, on-shoring or some combination – and develop partnerships with an expanding number of services providers will be able to increase shareholder value, reduce costs and enable affected workers to gain new skills. This will lead to greater productivity here and abroad. And, with the movement of lesser paying jobs overseas, will increase the average wage here because existing jobs and new jobs will require greater depth and breadth of skill.

Daksh, a leader in customer service centers in India, has doubled in size every year since its inception five years ago. Powered by American contracts, CEO Sanjeev Aggarwal says, “The demand for our business is virtually infinite. Outsourcing…has enhanced the competitiveness of industry — and if you aren’t competitive, you die.”

A sobering thought.
Thomas F. Kaminsky, Managing Director