Offshoring 3.0: The next step
I joined the offshoring industry in the 90s and I have seen it grow phenomenally over last two decades. Offshoring, particularly Indian Offshoring Industry, has come a long way having had consistent double-digit growth for more than two decades.
Over that time the industry has evolved to meet changing expectations:
Offshoring 1.0 (1980s and 1990s) was largely driven by cost arbitrage. The global multinationals were drawn to offshoring as it supplied first-rate talent at low wages.
Offshoring 2.0 (2000-2015) has been driven by the likes of Infosys, Wipro and TCS making offshoring scalable, leading to efficiency improvements. There have also been investments into quality improvements making offshore delivery model more effective.
It is very clear that incremental gains through cost arbitrage and efficiency improvements are now limited.
What should a multinational that has been offshoring for a decade or more do next to get incremental value? The answer lies in increasing effectiveness, managing risks and realising the offshoring’s full potential to create value. This cannot be achieved by outsourcing through offshore partners only.
Most of the large multinational corporations are now realising that many processes cannot be outsourced to a third party effectively as it leads to significantly increased risks. The increased risk is in terms of losing knowledge internally, inability to take control of these processes as well as over-reliance on suppliers for running core business processes. They are also realising that by offshoring these processes to suppliers, they do not have the same desired control and are unable to create IP for the company.
Where do we go from here? Does this mean that offshoring will reduce and large multinational corporations will start to bring back some of the core processes back in house?
The answer is offshoring is here to stay and grow but the current model will have to change to deliver incremental value to the customer.
Advent of Offshoring 3.0.
We are already seeing advent of offshoring 3.0 which will be driven by Global In House Centre led offshoring strategy. i.e. offshore centres staffed and run by own employees.
The core processes will be run in the GICs
The GIC will also have core R&D function and will be hubs where knowledge and Intellectual Property will be retained
The GIC may also be a stepping stone to additional revenue in the emerging markets and responsible for localisation of the products for the emerging economies and the other markets in Asia and Africa.
Work in the non-core processes or domains will continue to be to offshored to outsource offshore partners but more tightly managed through the involvement of GICs in the local geography leading to smarter offshoring.
The offshoring strategy is starting to change and in next few years I foresee that most of the multinational corporations will have an offshore GIC, which will form the core of their offshore strategy. There will be increased value through offshoring through better risk management, additional revenue generation through localisation and increased innovation through GIC initiative.
NASSCOM has already realised this and has set up a GIC industry forum to support global corporations to set up and grow their Global In-House Centres (GICS). (http://www.nasscom.in/global-in-house-centres). There are already more than 760 GICs operating out of India, across multiple locations accounting for USD 13.9 billion of export revenues, almost 21 per cent of the industry export revenues.
The numbers, size and more importantly the role of these GICs will grow significantly as Offshore 3.0 happens.
Offshoring 1.0 = Doing things at “lower cost”…. Usually by suppliers
Offshoring 2.0 = Doing things “right”…. Often by partners and suppliers
Offshoring 3.0 = Doing “right” things…. Often by ourselves and partners/suppliers managed locally
Subhash Sharma is Director of religent Global Ltd. (See Subhash's LinkedIn here)