The End of Outsourcing?

Most of us who have been in the trenches dealing with Outsourcing Partners in the last few years are puzzling over where it all is going. 3 major forces are changing the current model as we know it:

(A) Exhaustion of the Indian (or Off-Shore Labour Arbotrage) Value Proposition;
(B) The move to Everything as a Service (XaaS) as new players offer different types of service;
(C) The death of Monolithic Service contracts, as enterprises pursue increasingly complex Multi-sourcing models.

The original attraction of the Indian model was access to a large pool of well qualified talent which was artificially cheap as a consequence of exchange rate differences. As the offshoring model was pursued, the "Unseen Hand of the Market" has moved to erode the price benefits through year-on-year wage inflation and adverse currency movements. Additionally, as demand has risen, the talent has "followed the money" impatiently pursuing promotions, increased status and the opportunity to only work with the latest technology. This has led to unfettered job hopping, resulting in the loss of knowledge and the failure of individuals to develop deep experience. This has eroded the value proposition around talent. On top of this long distance relationships carry a heavy overhead in building them up and maintaining them, and the off shore players have developed business models and practices which assume that demand will continue to build at the same aggressive rate as previously. Many enterprises are actively taking things back on shore or in house.

The move to XaaS means that many of the traditional "box shifting and box running" services which were foundational to classic outsourcing are redundant. The traditional outsourcing players are losing the core "economy of scale" type services which they used to provide to IaaS and PaaS providers. Further more, the opportunities around traditional application based services are being eroded by SaaS providers. So although there are some niche opportunities where things like European data protection legislation or defence contracting requirements offer some opportunities, most of the market is moving to platforms such as those offered by Amazon and Microsoft. 

The continuous move to multi-sourcing started in the late 90s and has gradually built up steam over the last 20 years, especially as XaaS is now becoming the norm. This should also offer opportunity to move up the food chain to offer more value added services around Service Integration. Yet there is little evidence that any of the main outsourcing giants understand Service Integration or that there is appetite within customers to pay for it.

When I look at it, even in the area of Cyber where Security Operating Centre (SOC) services are in increasing demand, it seems that new entrants from the Aerospace and Defence industry have recognised and pursued the opportunities more aggressively, building both technical capability and market credibility.

So if you are looking at your service and sourcing strategy, it's time to think about what your model is, what kind of suppliers you need and to quiz them on their vision and direction. Otherwise you may be lumbered with a failing partner.