Offshore outsourcing in midlife crisis

I sat through an excellent presentation on offshore outsourcing yesterday at the Forrester Technology Leadership Forum 2006. Forrester analysts John McCarthy and Stephanie Moore held a mock debate on the current state of the offshore IT outsourcing industry.

I won't reiterate the 10 major points of their debate, but here are a few of the items I found particularly insightful.

• The best Indian firms have moved beyond pure "body shopping," to offer higher value full-service multiline delivery capabilities. Labor rates are rising, and the best firms are responding by improving internal processes and automating routine work.
  
  
• A massive shakeout is coming among the Indian offshore providers. Offshore contracts are rising in complexity and few of the providers have the management expertise and account management skills to handle them. As a result, only two or three of the top Indian firms will make it as full multiline suppliers.
  
  
• Some large multi-national consulting firms--specifically IBM and Accenture--are effectively competing with the Indian service providers for outsourcing contracts. For large complex offshoring contracts, therefore, IBM and Accenture are a viable alternatives to the large Indian outsourcers. But, in Forrester's estimation, other international consulting firms are far behind in their ability to scale offshore contracts.
  
  
• "Captive sites"--offshore operations set up as part of the customer's own organization--are not working. Companies see the large margin that Indian firms enjoy and think they can set up their own offshore operations and keep that money for themselves. But, John and Stephanie noted that nearly all such efforts have only succeeded in driving up labor costs for everyone, and that captive sites experience attrition two to three times greater than third-party sites. Forrester is strongly discouraging clients from setting up their own offshore operations.

John and Stephanie also pointed out that project failures are common in offshoring contracts, but most of them can be attributed not to a lack of expertise with the service provider, but the client's own lack of process discipline and a hands-off management approach.

Offshore vendors "need adult supervision and governance. Outsourcing does not mean abdicating responsibility" for project success.

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