By Cliff Justice a principal at KPMG
It’s amazing to me that, according to industry research, nine out of 10 organizations are using some form of shared services and outsourcing to deliver their IT and business processes. When I talk to our clients who have been outsourcing for some time, I’m amazed at how advanced and intertwined many of these relationships have become. Despite this success, the market is shifting and it’s clear that the outsourcing and business services industry is about to go through a change like never before.
In the past 20 years as a consultant and business operator, I’ve been fortunate to work with some of the world’s leading companies and participate in their transformation journey. Starting with the ITO mega-deals of the 1990s to the expansion of offshoring and BPO in the 2000s, companies have consistently sought ways to use sourcing strategies to reduce the cost of back office services. The improvements in productivity and technology have been significant, but there has been no better way to achieve cost reduction than through global labor arbitrage, i.e. offshoring. The easiest way for most companies to get there has been to outsource it to a third party, often based in India.
However, the past five years have introduced a number of significant changes which have begun to transform the traditional underpinnings of business service delivery in the Western world. For example, cloud technology and social media are ubiquitous. They are changing not just in how we connect with family or store music, but how we do business, collect data and deliver technology. These are more than new technologies; they represent a change in behavior in how the customer and business agree to interact, share information and conduct trade.
Perhaps as significant a change is who the customer is.
Our traditional low cost arbitrage markets have been India, China and parts of Asia. However, the success of outsourcing and global manufacturing has spawned a rapidly growing middle class in these regions, which is both increasing cost of labor and broadening the potential customer base for many companies. As this success causes the benefits of labor arbitrage to disappear, how do companies effectively serve new markets and where is the next level of back office savings?
I think most companies would opt for a few hundred million new consumers over 20 percent additional savings on IT and F&A. The competitive advantage will go to the companies that can both connect with new customers and do business effectively in these new markets with lower costs, better data and market insights, and operational flexibility.
When you think about SG&A functions for your business -- HR, IT, purchasing or accounting, etc. -- do you view these support services as a tactical necessity or a strategic weapon? Are they a cost center or a competitive advantage? While it’s not an either/or question (or answer), that’s the degree of contrast we see in the strategies and objectives of new business services models.
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