Traditional outsourcing models that revolve around labour arbitrage are losing their charm. Cost savings is still the primary driver for businesses, but many are learning that it isn't enough to compete in today's global marketplace.
Rise in labour wages, public outcry for outsourced jobs, and proposed regulations have made offshoring and outsourcing a bigger challenge than they already are.
On the other hand, offshore outsourcing is essential for businesses such as SMEs. It provides flexible outsourcing solutions that were once only financially accessible to their bigger competitors.
The solution is to find new ways to generate value out of the offshoring and outsourcing engagement besides cost savings. But while clients and their service providers say they do search for more strategic solutions, pricing models still focus on cost arbitrage.
Both clients and service providers need to examine other ways of value creation.
Outcome-based Outsourcing
An outcome-based pricing model is similar to managed services. The service provider determines the people, process, and locations that they will use to deliver the client's desired outcome. The client measures the results. This is less expensive for the client, while the service provider can better leverage their capabilities and manage their margins.
Offshoring is mostly about less expensive labour. Instead of using FTE (full-time employee), which indicates the number of full-time workers needed to deliver the volume of work, clients focus on the outcome of work produced. They can further improve the quality of services by having the right incentives in place.
The most common problem with this sourcing strategy is transparency. The client may feel that they have difficulty in resolving issues because the service provider is not honest enough about their operations.
This challenge can be overcome by an open dialogue between the client and service provider. Clients should choose service providers that have strong capabilities - people, processes, and technology - and industry experience.
SMEs are already taking advantage of cost arbitrage when they offshore to the Philippines and other premier locations, so why not leverage their service provider's offerings? With an outcome-based sourcing strategy, clients can have more cost savings and strategic business benefits.
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