By Peter Allen, Partner & Managing Director, TPI
Many outsourcing industry service providers are talking about the demands they are receiving from their clients for pricing concessions. We know of several cases in which clients are calling for a 5-15 percent reduction in the rates they pay for offshore labor and market analysts are following with reductions in the earnings estimates for several of the industry leaders.
I can’t resist pointing out that this is the downward edge of the labor arbitrage sword.
In these situations, I offer a different recipe to the parties. Rather than focus on squeezing the price of the commodity – and an hour’s worth of work or a day’s wage – why not look to maximize the value created through the relationship?
I tell the service providers: if you’re a leader in our industry, then turn the knowledge that you have gained from the work you’ve performed for your client into a different proposition. Take more risk, in return for the ability to sustain your margins.
I tell the clients: pushing the providers on their unit prices only creates issues at other places in the value chain. There are only so many levers available to the providers in a wage-arbitrage relationship. They will need to take actions in response to your pricing mandates that transfer more risk to you, the client.
At the risk of over-generalizing, these market conditions demand that companies increase the variability of their cost base and focus on total costs rather than unit costs. That means that your outsourcing service providers should be narrowed to a cadre that are able to scale down and up with your business, and do so without exacerbating your risk profile.
Ironically, I think this is best achieved by giving those providers more work – by leveraging the knowledge they’ve gained around your systems and applications to take on more scope, perhaps to include operational responsibilities.
Beware the pressure on unit costs when the bigger prize is improved total costs.
