Think Flat

So wrote Mark Twain after learning that a reporter was sent to investigate whether he had died.  I was reminded of this quote after reading the latest in a recent spate of articles predicting the decline of India as the leading global sourcing destination.

Citing unnamed "experts" the article, like others of its ilk, blamed wage inflation, hidden costs, and rising demand for skills as the reasons why companies are pulling out of outsourcing relationships or shifting offshore operations from India to "newer" locations. 

There are a number of problems with this line of reasoning.  First, it assumes that global services market is static and cost-obsessed and that the labor arbitrage model will always rein supreme. 

Certainly, cost reduction is and will remain a principal goal driving companies to move IT and business process activities to offshore locations.  But, it is not the only reason.  Establishing market presence or supporting local business activities in emerging economies are among the others, as is the need mitigate geopolitical risks.  Companies also look to different locations for local knowledge and linguistic and cultural reasons, e.g., to serve East Asia markets from China or EU countries from Central Europe.

Second, the thinking is that the limit for cost reduction opportunities in India has been reached and that the only alternative is to find someplace cheaper.  In fact, experienced sourcing practitioners today are greater savings in India than when costs were lower. 

These companies have developed and adopted best practices.  They’ve moved beyond commodity transactional sourcing to strategic sourcing, shifting more and higher-value functions and activities offshore, not less; achieving quality, productivity, and efficiency improvements and changing operations models and strategies in the process.

Third, a result of competition from lower-cost locations is often a dampening of wage inflation in others.  Today’s labor cost gap is tomorrow’s level playing field.  Moreover, as demand for technology skills to serve domestic needs in countries such as China increases, wage inflation will follow, as it already has in manufacturing.

Finally, the ongoing debate about what location will be "the next India" is based on an outmoded "offshore outsourcing" model, not a global sourcing one that is increasingly about vendor relationships and efficiency improvements.  The fact is that today's mature practitioners are just as likely if not more likely to rely on current partners to fulfill their geography resource requirements than establish new relationships. 

Multi-sourcing isn't about promiscuous sourcing, moving from country to country, company to company.  Successful sourcing practitioners are looking to consolidate vendor partnerships, not add more. 

Does this mean that they aren't looking to benefit from having a larger geographic footprint?  No.  It just means that the sourcing industry, like the global economy, is undergoing fundamental changes.  In that regard, it's safe to say that reports of the decline of India as a sourcing destination are exaggerated.

Posted by Stephen Lane at 06:39 AM | Permalink | Comments (5) | TrackBacks (0)

I was quite overwhelmed by the comments to my earlier post, here as well as offline! Most readers agreed that digital alternatives to cash are becoming prevalent. Many also alluded to the so called ‘unbanked’ segment of society and what service providers are doing (or need to do) to enlist them into the mainstream. That thought is an interesting lead into what I wanted to post as a sequel!

According to a 2004 Federal Reserve Board study, nearly 10 percent of American households are unbanked! One would assume that a developed economy like the US, with Banks at every street corner, would not suffer from such a glaring deficiency! It is this underserved segment that is now becoming the focus for some of the large financial institutions.

Bank of America found an innovative solution to capture the wallet share of individuals who did not have a bank account, yet wanted to transfer money frequently to their relatives abroad. It focused on the Hispanic segment of the US market which tops in money remittances from US to Mexico. Typically, such remittances used to be the exclusive preserve of money orders or specialized money transfer agencies like Western Union. Bank of America introduced a service called ‘SafeSend’ in the form of a pre-loaded Card, which could be used to transfer money securely from the US, with the ability to be withdrawn from designated ATMs in Mexico, using a secure code. After the initial success of this service, the Bank took the next step of converting its SafeSend customers to regular accountholders. SafeSend allowed the Bank to penetrate a new segment, which existed on the fringes of its core financial services franchise and gather data about their unique needs; in turn, that segment of the population grew comfortable in dealing with a traditional financial services provider – a win-win for both parties.

While the services typically used by such segments may not yield high per-capita transaction revenues for a Bank, their sheer volume and growth potential cannot be ignored. Most financial service providers will realize this sooner or later and tune their cost structures, to serve traditionally underserved segments, where the initial costs of market penetration are bound to be higher. Hence I was not surprised to read a recent news report on JP Morgan Chase (another Top 5 US Bank) piloting a Mexican remittance program called ‘Rapidcash’. The more interesting piece of news was from a recent conference organized by the parent organization of the reputed industry journal, American Banker, wherein Private Equity players evinced a keen interest in financial services for the unbanked (Read here - subscription may be required)!

Luring unbanked customers into a Bank Branch to cash a check or remit money overseas is just the first step; the Center for Financial Services Innovation, in a recent research paper on the ‘under-banked’ segment in the US, has underpinned the lifetime value of such customers, based on their future needs for a home loan, retirement account and various such financial products and services (Read the press release here).

Shifting focus to the global arena, Citibank has been a pioneer in penetrating new segments in developing country markets over the past decade. It’s ‘Suvidha’ branded account targeted the emerging middle class in India and lowered the minimum deposit requirement for opening new checking accounts. Citibank managed to service such accounts well, through ‘localized’ cost structures. I am sure other ‘Flat World’ oriented banks will start exploring innovative ways to expand their reach to the unbanked.

The larger innovations in retail banking are going to be, quite literally, outside the branch! Consider this – the number of mobile phones on this planet will soon outnumber (if not already!) bank accounts. Ubiquity of cell phone technology, coupled with Web 2.0 developments will push service providers to innovate and offer feature-rich, user-friendly mobile banking applications. And, as one of the comments to my earlier blog suggested, mobile phones can bridge language and literacy gaps and empower many more people who are currently outside the purview of traditional financial services. I hope to discuss more about mobile banking in another post!

Posted by Balaji Yellavalli at 09:34 PM | Permalink | Comments (6) | TrackBacks (0)

by Stephen Lane

I've been thinking about a recent Wall Street Journal article titled "Seven Myths About Outsourcing" (subscription may be required).  Basically, it is a cautionary tale that's been told many times in outsourcing circles.  Last year an outsourcing advisory firm also wrote a report along the lines of something like "the seven secrets of successful outsourcers".
 
Five years ago the authors could have written the same article about CRM and before that ERP.  We all know quite well that every business/IT trend follows the same path.  Gartner hit the nail on the head when they came up with their Hype Cycle.

True, vendors sometimes over-promise, but the problems in many outsourcing cases are due to failure to properly plan by the outsourcer -- that and a lack of dedicated program management.  Many first time outsourcers jump onto the bandwagon with visions of huge cost savings.  What they fail to realize is that if they don't have a good sense of their internal operations, they won't know what they are outsourcing and can't manage it well enough to get the desired savings. 
 
The moral of the story is that outsourcing is a strategic activity, one that requires planning, partnering, and a strong sense of internal processes and costs.  It also requires executive leadership, stakeholder buy-in, and dedicated ongoing management, which is the same for any strategic undertaking.  In raising these points the article is actually quite positive.  If anything, we and the other offshore vendors should be thanking the authors for pointing out what to most experienced outsourcing practitioners is obvious. 

The main problem that I have with the WSJ article is that it follows the recent trend of using the terms outsourcing and offshore interchangably.  The same myths have been and continue to be applied to domestic outsourcing, e.g., the old "your mess for less" approach that led to headlines a couple of years ago about dissatisfaction with outsourcing in general. 

True, the offshore approach does include a cultural wrinkle, which is one reason, but not the only reason why some our most advanced sourcing clients travel to India and other sourcing locations between 3-5 times annually to meet with us.  That kind of dedicated management and attention to relationships yields results.  So does experience, which is another point the authors make. 

Posted by Guest Author at 11:43 AM | Permalink | Comments (4) | TrackBacks (0)