Without getting too philosophical about it, what’s next depends on what’s already happened at your firm. Since every firm is in a different place, from those who are just dipping their toes for the first time to those who have a very developed model, let’s focus our answers on firms with more developed models. Let’s say, for example, that we’re looking at firms that have been outsourcing for at least five years and have off shored or near shored just about everything that makes sense. Does that sound like your firm? If so, what can you expect from this sort of mature model in 2011?

If you’ve done everything right, you may have already hit the best blended rate that you can expect. Why? Well, if you’ve placed the right resources in the right location, and you negotiated aggressively when you signed your last contract, there’s not a lot of room left for obvious big savings. With the economy appearing to improve, it’s unlikely that there is a much lower bottom to your prices if you negotiated your last contract in the last 2-3 years. Given the 10-15 % annual inflation in India, if anything you are going to be faced with strong arguments for price increases as you negotiate your next contract. There might still be room for some slight downward pressure, but overall you’ve probably pretty much seen the lowest offshore price. Unless your offshore location had a particularly high local labor cost, say Canada or Australia, and you plan to move your operations  to a lower cost location. But if you’ve been working in a lower cost location for several years, and have built up expertise and intellectual property, is the incremental value of making this move worth the effort? It might be, but it’s not as obvious a solution as your first outsourcing project. If you don’t have a very detailed set of metrics on this operation, it may not be possible to determine how long it’s going to take to pay back the cost of relocating your operation. Even if you can keep your offshore costs flat, the encouraging economy of 2011 is likely to raise the cost of your domestic/in-house team as they press for raises and promotions.

Does that mean that departments with mature outsourced models have no alternatives for managing costs? Not at all! But it does mean that price negotiation and jiggering locations are not where you should focus. There may still be some minor savings, but you’re not going to move the needle very much. You need to look elsewhere; in this case the “elsewhere” is productivity. Take a look at each of your locations: in-house, near-shore, offshore. Regardless of the price you pay per hour at each location, are you getting the same level of productivity?  How do you know? Have you run real comparisons between all of your locations… without “making allowances” for lower cost labor? I’ve found that many firms make too many allowances for local labor markets, making fewer demands of off shore and near shore. Unfortunately, lower expectations often lead to lower productivity. In the very early days of running a new location, when it is still in training mode, it makes sense to limit expectations about productivity; however, if the location (much like a new shift) has not caught up years later, then it’s a false comparison to look at the price per hour and say that offshore (or anywhere else) is less expensive. Brining every location up to the same level of expertise needs to be part of your planning process. Some locations may never attain full expertise, and that’s OK if it is a clearly understood assumption in the value proposition. It’s also OK for a location to take 5 or 10 years to reach full expertise, if that’s what it takes. But you need to clearly define the limits, or perceived limits, of each location, and then decide if each location is performing to its full capacity. Once you fully understand this, you may change your opinions on what is the right mix of locations (which may bring significant savings), or you may be able to produce more at each location… reducing or avoiding costs as you grow.

Obviously, there is a lot more to be said on this subject.  And we will take this up again tomorrow and dig a little deeper into how you can get more productivity from each of your locations and how to maintain or reduce your costs. But for today… that my Niccolls worth!