Global service providers outsourcing's next wave: going beyond outsourcing to merely lower costs, today's leading companies are using "global sourcing" to drive new forms of revenue and create top-line growth. What value are they obtaining, and how are they doing it?

Most companies have outsourced some portion of their business to lower costs and, over time, have achieved cost savings in the outsourced portion of the business. But unless your efforts in outsourcing to lower costs are unusually good, you are not gaining a sustainable competitive advantage, since your competitors are outsourcing just like you are.

Leading companies are now using global resources to drive new forms of revenue and grow their top line. Companies are realizing new forms of business value through their global sourcing partnerships by accelerating new product development, shortening time-to-market and finding successful entrees into new markets. Companies that are realizing these benefits from their global sourcing strategies are also creating new forms of value for their customers and sustainable competitive advantages for their businesses. This is the next wave of outsourcing.

Outsourcing's Next Wave

The next wave of outsourcing is about assessing all aspects of an organization's business activities to determine if and where there are opportunities to leverage outsourcers' capabilities, intellectual property, best practices, global infrastructure or geographic presence to access resources and capabilities around the globe that may not be available to your business today. Outsourcers that provide this expanded set of services are referred to as global service providers (GSPs) to emphasize the differentiation between these firms and outsourcers, which provide only low-cost staff augmentation services.

These new capabilities are helping corporations operate business processes and develop products better, faster and at lower costs. Several recent examples demonstrate how outsourcing is evolving and how major outsourcers are helping their clients advance beyond the basic cost-saving benefits of global sourcing:

* On Jan. 15, 2007, Banco Pichincha, Ecuador's largest private bank, announced the strategic outsourcing of its core banking solution, followed by its information technology (IT) and business operational processes to Indian outsourcer Tata Consultancy Services (TCS). The deal is valued at $140 million over five years.

* High-tech manufacturers are using Wipro Technologies's lean manufacturing expertise to shorten new product development cycle from 10-12 months to 6-8 months, while lowering costs 30 percent, by using offshore resources.

* A global IP-PBX network equipment and solution provider filed a U.S. patent for the innovation involved in a product that Infosys Technologies Ltd. designed and developed. The Web-based software tool was delivered in 40 percent less time and at a 40 percent reduced cost.

Moving beyond the basic skills needed to perform IT services, quality assurance, testing and software development, GSPs now have product design, product architecture and lean manufacturing skills.

Similar to the Japanese auto manufacturers, which started building lower-value cars for the U.S. market more than 20 years ago (and who now produce some of the highest-value vehicles in the U.S. market), outsourcers that started 10 to 20 years ago by providing lower-value IT services have worked their way up the product development/manufacturing process. They are now providing higher-value services, such as R&D and engineering services for new product development initiatives. They are also taking on core business processes for new revenue opportunities for corporations around the world.

What Has Changed?

This new value of outsourcing is possible because GSPs have invested in significantly increasing staff knowledge. As they have gained experience, these GSPs have developed industry-specific expertise and business process outsourcing solutions.

In addition, the leading GSPs have expanded their onshore capabilities in developed markets and have established development and support centers in lower-cost geographies, such as China and Eastern Europe. This allows GSPs to continue providing both a cost advantage and a "best-shoring" delivery capability.

Finally, current advancements in technology solutions allow GSPs to seamlessly integrate remote business processing solutions and product development capabilities into their clients' business operations and infrastructures.

For example, many of the most successful high-tech vendors have been vanguards in the current globalization trend. They have taken advantage of the ubiquitous availability of high-bandwidth connections around the world to shorten their product development lifecycles by utilizing distributed, multi-location product development engineering teams. Tying this all together, GSPs have made significant investments to develop state-of-the-art technology infrastructure to support 24x7 product development and support services.

The Next Wave: Financial Benefits

Companies are obtaining new forms of financial and business value by partnering with GSPs that go significantly beyond the cost savings achieved by the first wave of outsourcing. Some of the business and financial benefits of this next wave of global sourcing include significantly lowering R&D costs and shortening time-to-market for new product development processes. Many companies are lowering their relevant R&D and engineering costs by 20 to 40 percent, while also shortening their time to market for new product development initiatives.

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Several companies are teaming with GSPs to share up-front product R&D costs, thus reducing their overall capital investments. The quid pro quo for global partners is that their investment in R&D will be rewarded with a guarantee that their products or services will be included in the product when it is sold.

Outsourcers tend to be risk-adverse and want to be paid as work effort is expended. However, this is changing. Global service providers are now often willing to accept penalty or incentive clauses. Rather than paying for outsourced resources on an hourly or even fixed-price basis, some organizations have negotiated for lower offshore development costs by providing a percent of the product sales.

The Next Wave: Business Value Benefits

Compared to outsourcing, where lower costs are often the only benefit, the new wave of global sourcing is providing significant non-financial business value. Among those:

* Faster time-to-market. Global partners often have business process or quality expertise to improve the product development process. Companies are achieving time-to-market savings of 25-50 percent, dramatically improving a company's market position.

* Ancillary / additional revenue streams. Companies are teaming with global partners to develop products specific to new markets. Rather than invest time and effort to create a product for profitable but lower value markets, some companies are outsourcing the development or support for these lower-value markets.

One software company was going to sunset its consumer product line, forgoing potentially hundreds of millions of dollars in revenue. Its goal was to concentrate resources on its enterprise market opportunities, which were viewed as much more strategic and lucrative over the long term. Instead, the company negotiated with its global sourcing partner to create an innovative arrangement in which the partner took on primary responsibility for ongoing development of its consumer product lines for a portion of this otherwise lost revenue stream.

Companies are using the expertise of global partners to enter new geographies. For example, one client wanted to open three sales offices in China to better address growing business opportunities in that region. For its client's Chinese subsidiaries, Wipro created the financial business process and technical infrastructure that allowed a sales and distribution network to be created across three provinces and four companies. In this case, addressing differing legal requirements in each province, creating multi-language documentation and the use of bi-lingual staff were critical to the successful rollout.

* Process improvement. For a large U.S.-based mortgage processor, Infosys re-engineered the entire loan servicing process. The number of transactions processed each day doubled, and there was a 70 percent improvement in rate confirmation turnaround.

The New Wave: Challenges In Realizing the Benefits

This next wave of global sourcing is different from the first wave in that increasing top-line growth requires a much closer working relationship between a company and its global partner(s).

As companies begin to rely on partners to take on significant responsibilities for business processes that directly touch core product development activities, customer interactions or operations of core systems, much more carefully synchronized coordination and governance is needed. In many cases, companies are still hesitant to entrust a partner with the primary responsibility for processes and operations that are either core to their business or directly impact their top-line growth.

Those companies that have been successful in embracing the next wave of global sourcing are setting the course of best practices for success. One success factor is having an organization-wide strategy. Companies that develop outsourcing strategies on a department-by-department basis do not realize the same benefits as companies that develop an organization-wide strategy and share learning across departments.

From an operational perspective, best practices include putting in place weekly and monthly management reviews. Senior management should be involved in these reviews, and both quantitative (how many tasks are completed vs. planned?) and qualitative (how confident does management feel that the offshore team will succeed?) measures should be included.

Risk management is also important from numerous perspectives. For example, from a structural perspective, companies can either start small and gain experience in running and managing these projects or ensure that their partner has specific expertise in their industry and/or the technologies that are being used. From a financial perspective, risk management can include defining detailed service-level agreements, with both financial incentives and penalties written into these contracts. A risk assessment and management plan should be created as part of an organization's outsourcing strategy.

Outsourcing for Competitive Advantage

The strategic value of outsourcing is changing from cost reduction to revenue generation, and over time, this change will affect most industries. What should senior finance management do?

* The most important point is to have a global outsourcing strategy. An organization's outsourcing strategy should consider its own business strategy, how its competition is approaching outsourcing and what capabilities are or will be available from global service providers over the next 1-3 years.

* Weak areas in a company's revenue-producing activities are opportunities for partnering with a global service provider. Consider, for example: Is our R&D cost higher than our competitors'? Does it take us longer to bring a product to market? Do we have the knowledge to enter new markets?

* The benefits of partnering should be balanced against an organization's risk tolerance for outsourcing and experience. A company with a lot of outsourcing experience should approach this new wave differently than a company with little experience.

Like the first wave of outsourcing, this next wave of global sourcing will become pervasive over time. Companies that start now to assess the opportunities, value and risks of this next wave can develop an approach to obtain the business value best suited to the company's potential, risk profile and overall business strategy.

TAKE AWAYS

* The next wave of outsourcing is about assessing an organization's activities to seek opportunities to leverage outsourcers' capabilities, intellectual property, best practices, global infrastructure or geographic presence to access resources and capabilities around the globe.

* Outsourcers that provide this new, expanded set of services are now referred to as "global service providers," or GSPs.

* It's important for an organization to have a global outsourcing strategy that considers its own business strategy, how its competition is approaching outsourcing and what GSP capabilities are or will be available over the next 1-3 years.

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THEO FORBATH is Chief Strategist and Practice Leader for the Global Product Strategy & Architecture (PSA) Practice, and PETER BROOKS is a Senior Business Architect in the PSA Practice--both with Wipro Technologies, the global IT services business of Wipro Limited. Both are based in the Boston office of the Bangalore, India-headquartered company. They can be reached at [e-mail] and [e-mail].