Duke - The Fuqua School of Business

News Release

Providers of Globally Sourced Labor Expanding Services Amid Intense Competition, Changing Market Conditions

Prof Arie Lewin: "Service providers now must offer more than just cost savings..."

Arie Lewin
September 26, 2011

DURHAM, N.C. — Outsourcing service providers are taking steps to diversify service offerings in order to stay competitive in today’s marketplace, 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 over 50 countries and found the shift in the outsourcing industry is having an impact on incumbent India-based and U.S. firms that are caught in a “perfect storm” in which today’s competitors are entering new markets with both low-end, commoditized services with few market-entry barriers, and also with high-end, value-added services that drive higher margins but 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,” said Dr. Charles Aird, 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 global footprint to move closer to their clients. The areas where most large buyers of outsourced labor are located — the U.S., Western Europe and Japan — 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,” said 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 the client’s decision making around the 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,” said 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 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 over 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," continued 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,” said Aird. “We expect the merger and acquisition trend to continue over the next few years. Leading providers are preparing today to win in the marketplace of tomorrow.”

View a detailed report of the survey.