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Myriad sourcing flavours - Will they merge ?
Peter Allen over at TPI argues that vendors need to know where they stand on the sourcing continuum (What type of a provider am I ?) and buyers need to know what type of sourcing they need (Should I go for a transformational partner or stick with a commodity player).
"It’s important for outsourcing buyers to know what sort of relationship they need, and equally important for service providers to know how they will be slotted into the hierarchy within the service portfolio.If you want a strategic partner, don’t select a provider that has built a business on being a leader in a commodity category. Similarly, don’t hire a transformational expert if all you really want from the relationship is cost-benchmarked services delivered just like many other providers. "
Very true. The "Big five" started with solid relationships with the business, primarily around finance, auditing and business process. This allowed solid board level relationships and well as a good understanding of industry business processes and pain points. They branded themselves as transformation partners and charged clients hundreds of dollars an hour for providing 'thought leadership'.
The Indian giants started out as pure body shops. Learning to effectively 'package' resumes on the front end and while doing that, drove decent operating margins through operational efficiencies. The Y2K opportunity was the poster boy of this model at it's best. Vendors grew like weeds and life was good. The norm was that the big five would come in and produce a word document that would lead to downstream implementation business that would be cherry picked and handed out either to the big five - the turn key, high end stuff or to the traditional offshore players- the repeatable, commodity work.
This state represented the three sourcing flavours very distinctly with firms occupying one of the three tiers that Peter brings up. With a high volume, high margin business and a booming Indian stock market, traditional IT players started investing in areas outside their comfort zone of commodity technologies. Companies got verticalized, technology practices lead by centres of excellence got formed, project management capabilities got matured and the list goes on and suddenly, the Big five's started getting their business models exposed. Clients started realizing that there was a value gap. They were leaving money on the table and a lot of work being done by highly experienced onshore Big Five consultants could be done offshore.
The Big Five reacted by aggressively building offshore capabilities - even at the cost of commoditizing their existing business with all the political ramifications. They had no other option. This lead to accelerating commoditization of the backend, while at the same time shifting the battle to the front end. Traditional offshore players reacted by strengthening their front end, sometimes organically, but mostly inorganically. You can see that playing out currently.
What does all this mean and where will it leave us ?
The dividing lines are clearly merging. The best of traditional offshoring players and the best of the multinationals will form a unified high end Tier-1 sourcing layer. These vendors that will have the capability to conceptualize quality business solutions and execute them virtually and globally in a truly 'flat' sense with the ability to exploit local geographic strengths while enjoying global scale. They will straddle IT and business seamlessly and across industries and will be able to offset margin pressures with a combination of high end value and unique flat execution efficiencies.
What of the rest ? They will either need to find niches in which to survive or will get acquired. With factors like the long term appreciation of the rupee, escalating infrastructure and wage costs, the so called tier-3 and tier-4 vendors will find the going tough. They will not be able to play the cost game in the commodity space and neither will they be able to retain the kind of talent needed to play the high end game. We could see some of these players moving towards a localized onshore and near shore model, cherry picking leftovers from the tier-1 players. Others could consolidate and merge between themselves in an attempt to squeeze maximum scale in a commodity business. This is likely in areas like testing where there is a case for independent validation and given the pace of growth in the testing market, an attractive scale proposition.IT strategy Outsourcing
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