A One Trick Pony

by Pillsbury Global Sourcing Practice

Labor arbitrage has long been a feature of ITOs . With off-shore to on-shore staffing ratios in the 65:35 to 75:25 range, suppliers have long used arbitrage to deliver significantly lower pricing. IT organizations have made many a CFO happy when recommending deals featuring 20%+ savings, especially done under the pressure of corporate "blood" drives to cut costs. Unescapably, however, corporate "blood" drives are a lot like the girl scout cookie sales season, just when you think you gotten everyone happy, here comes the next guy trying to boost his kid's financial performance.

Unfortunately, our one trick pony is also a one-time pony, especially with deals where off to on shore ratios have been maximized. When the CFO next comes calling, our pony is fresh out of tricks; there is no more arbitrage to be had -- at least not from the same delivery market. What is next? Shall we pack our bags in Bangalore and head off to a Chinese Model City or perhaps see what kind of benefit stream enrichment can be had in Ghana or Mauritius? Most buyers, we suspect, will not find this an appealing prospect when viewed through an operating risk management lens.

Maybe it is time for a change in approach. Instead of continuing to try to derive benefit from pushing on the P lever, maybe some answer can be found by putting pressure onto the Q factor in the equation. Rather than buying cheaper labor, how about we find a way to use less labor. One way to reduce labor demand is to gain leverage through standardization (ala Google and Amazon), but heterogeneous installed bases, which reflect most of our clients' environments, are notoriously resistant to standardization efforts. Good idea, best practice even, just not responsive to the CFO demand for results sooner rather than later. So then why not turn to the reason why we have computers in the first place -- to do things faster and cheaper than people can do them. How about the shoemaker's children taking some of their own medicine and using their own technology on themselves? Why not use technology to automate IT business processes and reduce the number of people needed to operate these complex infrastructure configurations? Assuming we can keep labor rates in roughly the same range, fewer people equals a lower labor cost, which equals lower prices, which means happier CFOs. And happier CFOs are a good thing for CIOs.

New deals should include both elements of labor arbitrage and automation and it should be reflected in lower and sustainable managed services unit prices. The challenge is to scrape a reasonable amount of the benefit onto the customer's side of the ledger in the face of the supplier's desire for "margin enhancement". More difficult are existing deals; the client's need to pledge to the corporate "blood" drive is real and imminent. The supplier's desire to please their investors with better margins is equally real. In the long term, automation will drive services up the efficiency curve and down the pricing curve. The new trick for the customer is to extract at least some share of the benefit in the short-term.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Pillsbury Global Sourcing Practice

Pillsbury Global Sourcing Practice on:

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