Home / Opinion / Views /  The outsourcing model may be running out of steam
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Amid the covid pandemic and growing unemployment, India’s income tax department decided to digitize front-end tax-related processes on the internet. Two years on, Indian taxpayers are yet to get a reprieve from the frustrations of filing taxes online and numerous other errors. The tax department’s reputation has taken a severe hit because it launched this changeover without proper user testing. Not many blame its tech partner—in this case, Infosys.

It is ironic that what heralded the infotech revolution in many developing economies, including India—the cost/labour arbitrage model of outsourcing business services—may not be the best value creator for an enterprise outsourcing such services. It could have an adverse impact and even be a competitive disadvantage in the long run.

Years ago, many Indian telecom firms had outsourced customer call centres. The net outcome was higher customer attrition, thanks to business models focused on cost reduction. Third-party call centres charged clients for time spent on dealing with customers and not solving their problems. Worse, key customer insights gleaned that could have improved service quality eluded those telecom firms.

Take another example. Amid the current Schengen visa delays, most EU consulates seem to have overlooked a major issue. Visa applicants leave with a bad experience and blame the countries they are seeking entry to without realizing that visa application processes have entirely been outsourced to VFS Global. Not only has VFS tweaked its processes, but also reduced transparency in appointment scheduling by not displaying slot availability calendars, nudging visa applicants to opt for its premium services or employ travel agencies.

While it may be cheaper in the short-term for countries and companies to outsource such seemingly non-critical work, the goodwill and equity they lose are immeasurable. It is sometimes better to have a captive centre for shared services and critical processes that impact one’s business, brand, customer retention, reputation and future growth initiatives. Cost reduction is not everything.

Amid global recession worries, every large entity must review its model. Should it stick to its outsourcing policy or set up a captive (i.e. in-house) interface with customers on the lines of global business services (GBS)? Yes, having one’s own service centre will take higher capital expenditure and more senior management time (at first), but cost optimization is not always the best way for enterprises to create value. Business chiefs who value short-term gains love the outsourcing model as it can turn their short tenures successful. Outsourcing partners get to grow, but, armed after a few years with unique insights on various aspects of their client’s business, they are able to pitch for the next level of value-added services, as most Indian IT majors have done.

The benefits of having a captive GBS unit are intangible, and, as with all intangibles, they may not create value directly but can come to drive gains in terms of market insights, service needs, innovation ideas and growth avenues.

In a GBS model, the captive unit’s employee culture is the same as the parent’s and all workers are acquainted with business service processes. Done right, these workers are aligned with the vision, mission and values of the company whose reputation is at stake. Contrary to what some IT firms let businesses believe, in many shared services, better productivity can be achieved by one’s own employees if provided with the right tools and all the processes are optimized, albeit at a higher cost. The goal is to use the learning curve of experience and align the brand promise with delivery.

Own employees skilled to deliver better services to internal customers, such as various divisions or business units, also enables better control over decision-making and speed of action. For instance, a captive unit can quickly mine data and provide faster solutions to a business wing that confronts a critical problem.

A leading global consumer healthcare company recently set up its own GBS for support services in Bangalore after ending two decades of an outsourcing partnership with a Delhi-based company. Costs savings were outweighed by the benefits of its move.

In many industries, gains can be made on standardization of processes across multiple countries, speed to market, attracting and retaining talent, process automation and digitization, and continuous improvement. Another critical benefit is that a business’s own employees have a better sense of ownership of brand promises, which lowers some training costs. Moreover, it’s always easier to communicate within a company than with a third party. Trade secrets and other sensitive data also stay safer.

Defenders of outsourcing might argue that it’s not just about cost savings, but also workload and burnout reduction, allowing a firm to focus on its core business. Indeed, insignificant processes that add no value overall would qualify for outsourcing.

Yet, global enterprises are becoming wary of giving third parties access to their internal systems and processes, given the rising cases of data breaches and a dearth of relevant insights for growth and innovation.

Analysts may have seen the writing on the wall for outsourcing, as suggested by the stock performance of some Indian IT service companies. Perhaps businesses reliant on outsourcing should also swerve away.

M. Muneer is co-founder of the non-profit Medici Institute. He tweets at @MuneerMuh 

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