Executive Briefings

Labor May Well Put the Brakes on Outsourcing in 2008

Labor will be the driving factor that changes outsourcing in 2008. How companies determine who to hire and where they will work will affect the industry in two ways.
First, labor arbitrage is undergoing a metamorphosis. In the past, the megatrend was to use labor arbitrage wherever possible. Buyers found they could enjoy really significant cost savings with no impact on quality if their suppliers used labor in low-cost areas. The equation was simple: tasks that could be done remotely moved offshore.
Today, that equation is changing. Today buyers want to alter how they use employees. But now it's not just sending them offshore. Now buyers want to change other services in which labor is a component. This is changing the fundamental way suppliers provide services.
Trend two: outsourcing is starting to see the limits of labor arbitrage. Until now, the industry experienced an unconstrained movement of work offshore. If the supplier could document the process so someone else could perform it, off it went.
Now there are signs that large, experienced corporations with mature relationships are discovering limits to what they can offshore. These companies have tried to push work into remote management either by fiat or by contract. But the work somehow re-purposes itself. No amount of contractual guarantees or organizational determination seems to solve the problem. That's because they've butted up against offshore equilibrium, which determines the percentage of work that outsourcing buyers can offshore, either to a third-party or their own captive.
Source: Outsourcing Journal, http://www.outsourcing-journal.com

Labor will be the driving factor that changes outsourcing in 2008. How companies determine who to hire and where they will work will affect the industry in two ways.
First, labor arbitrage is undergoing a metamorphosis. In the past, the megatrend was to use labor arbitrage wherever possible. Buyers found they could enjoy really significant cost savings with no impact on quality if their suppliers used labor in low-cost areas. The equation was simple: tasks that could be done remotely moved offshore.
Today, that equation is changing. Today buyers want to alter how they use employees. But now it's not just sending them offshore. Now buyers want to change other services in which labor is a component. This is changing the fundamental way suppliers provide services.
Trend two: outsourcing is starting to see the limits of labor arbitrage. Until now, the industry experienced an unconstrained movement of work offshore. If the supplier could document the process so someone else could perform it, off it went.
Now there are signs that large, experienced corporations with mature relationships are discovering limits to what they can offshore. These companies have tried to push work into remote management either by fiat or by contract. But the work somehow re-purposes itself. No amount of contractual guarantees or organizational determination seems to solve the problem. That's because they've butted up against offshore equilibrium, which determines the percentage of work that outsourcing buyers can offshore, either to a third-party or their own captive.
Source: Outsourcing Journal, http://www.outsourcing-journal.com