The third phase of outsourcing

A recent survey by TPI shows that 81% of large UK companies expect to increase their offshoring activities over the next 2-3 years, with just 4% saying they will decrease it. Other recent stories have focused on the woes of outsourcing. While these stories seem to be contradictory, the reality is that companies are not usually responding to outsourcing problems by stopping the practice. Rather they are working out how to do it better. This is reflected by another major finding of TPI’s survey: companies are tending to offhsore with wholly-owned subsidiaries rather than contracted providers. This relates to my current work on the rise of “knowledge-based” outsourcing. The global outsourcing business is rapidly moving into its third phase. In the first phase of outsourcing, organizations paid companies to take over selected business processes. In the second phase, clients became more sophisticated, specifying in detail how the companies would create results. The emerging third phase of outsourcing is “knowledge-based” outsourcing, in which organizations develop deep mutual knowledge, design knowledge transfer, and integrate their business processes so that the outsourcing companies are in a situation to effectively “lock-in” their clients. In some cases, in order to get that level of integration, you want the offshoring company to be owned by you. However this means far less flexibility on many levels. Ultimately you do want an external provider that can provide a high-level of knowledge-based integration. This relates to the rapidly increasing quality of offshore service providers. Another finding of the TPI survey is that 60% of UK companies believe that Indian companies match local UK providers on quality, irrespective of cost. Indian outsourcers, which for now are in the vanguard, are very actively focusing on building effective knowledge-based relationships. I featured Infosys as a major case study in the second edition Developing Knowledge-Based Client Relationships for some of the great work they’re doing on this.