Outsourcing service providers are taking steps to diversify service offerings to stay competitive, according to new research from The Center for International Business Education and Research’s (CIBER) Offshoring Research Network (ORN) at Duke University’s Fuqua School of Business and PwC US. The third annual survey of providers of offshore labor is part of ongoing research into the effects of offshoring trends on the economy and reflects changes in the provision and consumption of global sourcing in recent years.
PwC and Duke surveyed of 620 service providers at 1,850 companies from more than 50 countries and found that a shift in the outsourcing industry is affecting incumbent India-based and U.S. firms. These are caught in a “perfect storm” in which new outsourcing competitors are entering new markets to offer both low-end, commoditized services with few market-entry barriers, and high-end, value-added services that drive higher margins where market entry is more challenging.
“Given the current market condition, relying only on low-cost and labor arbitrage is no longer a successful strategy,” says Charles Aird, Ph.D., the U.S. and global leader of PwC’s Shared Services and Outsourcing Advisory Practice. “To gain a competitive edge in today’s dynamic and increasingly global marketplace, it is critical that providers go beyond the third-party service-delivery relationships of the past and find ways to become valued business partners.”
According to the report, there is a trend toward nearshoring, with service providers expanding their global footprints to move closer to their clients. The United States, Western Europe, and Japan—areas where most large buyers of outsourced labor are located—are especially attractive nearshoring target locations. Thirty-six percent of respondents say they have headquarters located in North America, while 26 percent report headquarters in Western and Eastern Europe. The survey also found China, Latin America, and Eastern Europe are quickly emerging as new magnets for outsourcing firms looking to expand.
To address the need for frequent interaction with clients and the extensive use of collaborative technologies in fields such as innovation services, firms are seeking offshore locations closer to their clients’ headquarters. “U.S. firms may be saddled with the legacy effect of early offshore locations in India before closer Latin American locations were established,” says Arie Lewin, professor of strategy and international business at Fuqua and director of CIBER.
As noted in the survey, the importance of workforce skills and training has increased since 2009, becoming the most vital criteria in a client’s decision making when choosing between a selection of service providers. Companies are planning to make aggressive investments in training centers for internal staff—especially in functions involving a high level of client-specific knowledge and frequent interaction with clients, such as research and development and design services—enabling them to get closer to the client’s core competencies.
“The global sourcing industry is undergoing significant changes,” says Lewin. “Clients expect providers to contribute value beyond just cost savings. Global sourcing is becoming more competitive all the time. Service providers now must offer more than just cost savings; they must add value to their clients’ business processes.”
The survey also found more than 56 percent of outsourced labor providers plan to invest in new areas of expertise, with a primary focus on cloud or service-oriented architecture aimed at integrating disparate web applications, and centers of excellence teams promoting collaboration and best practices. In addition, 74 percent of service providers plan to continue expanding the scale and scope of their services; mergers and acquisitions account for 13 percent of planned growth during the next three years, with 13 percent of service providers indicating a desire to become an acquisition target.
“Going forward, providers need to make a conscious decision about which markets they want to enter,” continues Lewin. “To that end, they should focus on growing markets where demand for a given service is strong, and where they have superior capability and a competitive advantage over their rivals.”
“As providers seek new ways to increase the scope and scale of their service offerings and expand their global footprint, we are seeing both organic growth and growth by acquisition,” says Aird. “We expect the merger and acquisition trend to continue during the next few years. Leading providers are preparing today to win in the marketplace of tomorrow.”
View a detailed report of the survey.
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