Labor Cost Arbitrage and Procurement Outsourcing: Why is This Still a Topic of Discussion?

Getting up on his virtual sandbox, former analyst Phil Fersht recently proffered his predictions for the outsourcing market in 2010. Even though Phil is no longer officially an independent analyst given his role at Cognizant, I still turn to him first for his opinions on the subject, if for no other reason than he is quick to buy the first round of drinks if he knows that someone is actually listening to him. (Which most others do as well, in most cases, even if they're sober and reading his stuff from a distance.) Because Phil, unlike most analyst types who look at the outsourcing arena, is anything but boring and staid in how he looks at things. Consider his view, which I unfortunately hold as well, that "Labor arbitrage will continue to dominate outsourcing, but the smart providers will be focused on providing consultative value to their clients." In the procurement sector, there are still far too many deals getting done for the wrong reasons, including the labor-cost arbitrage of the kind Phil points out.

As Phil notes, "When you consider that 75% of service-provider staff for ERP development and support are still onshore, there's a lot more wiggle room for new and existing clients to cut costs through lifting and shifting work offshore." This statement could be applied equally to transactional support in procurement focused on the plumbing, supplier enablement, and data management associated with P2P processes and systems. Far too many companies considering procurement outsourcing in this regard are more likely to see dollar signs from their own inabilities to reduce operating costs rather than the opportunity to actually get a process right in the first place. But, according to Phil, if there is any good news in this, it's that "Those providers proving operationally efficient and cost competitive to win this labor-arbitrage work today will find themselves in a strong position to push higher-end business-transformational services in the future, because they will already be present within clients delivering operational work."

Still, I find it a shame that, when it comes to procurement outsourcing in general, decisions related to labor cost still come to dominate many decisions. There's so much more to be saved from outsourcing by better sourcing, supplier management, demand management, risk reduction, and targeting new areas of spend (e.g., services/contingent spending) that cut across global lines of business. And all of this can, in theory, be outsourced to providers who don't have to necessarily be as politically careful -- provided they have CFO and CEO support -- about the potential minefields they're walking into. Perhaps labor-cost arbitrage is easy for companies and procurement executives to get their arms around; it's most certainly less threatening than admitting that their own processes and capabilities leave something to be desired. But as long as the outsourcing-opportunity discussion focuses on this level, organizations will be short-changing themselves aboiut the true PO opportunity.

- Jason Busch