The Deep End of the Pool

Consulting firms with no intention of entering the outsourcing business have also been affected. The prevalent outsourcing model, which bundles consulting services into larger outsourcing engagements, has nudged the price of traditional consulting services downward, notes Eric Joseph, managing partner of global business and professional services companies at executive search firm Heidrick & Struggles.
 "Many modern-day services firm executives face the challenge of dealing with a marketplace that is becoming somewhat more commoditized," says Joseph. "Selling value that can differentiate one provider from the next has become difficult."
"It is an addictive drug," says Dean McMann, CEO of McMann Ransford, a firm that advises professional services firms.
While buying into the need to balance project work with longer-term engagements to improve the predictability of revenue streams, McMann believes that an addiction to outsourcing ultimately leads firms to a commodity business, where rock-bottom price alone determines the winners and losers.
The other end of the spectrum is occupied by those who believe that everything but the core offering will be sent out the door. "I think that you'll eventually have companies that manage brands," says Cliff Justice, multishore practice leader for EquaTerra, a Houston-based outsourcing and insourcing advisory, research, and governance services firm. "All support functions will be outsourced."
Those with cautious approaches to the profession's embrace of outsourcing view it as an event whose bad day will eventually come. Firms that change their perspective of the world based on an event, McMann points out, tend to get hurt when the event concludes.
"In some ways, outsourcing is similar to the ERP phenomenon," he says. "It was not long before the people who ran the firm starting coming out of the ERP practice. When that stopped, they didn't understand the world as a norm. They understood an event and not the business. That's what's going on now."

Despite outsourcing's allure as a growth engine, adding offshore talent "is a daunting task," says Joseph. Margins are thinning in many outsourcing areas, and the work requires scale and expertise. "I think that the barriers to entry and the opportunity to truly build successful businesses in outsourcing are perhaps even more challenging than in traditional consulting," he adds. "There, if you get the right people out of the right practice areas, they can bring clients and build work and develop people. … Firms are finding a difficult time getting into business."

Time Zone Management

More barriers await once firms have taken the plunge. The challenges of managing an outsourcing business are to a large degree mundane in nature but significant in scope.
"You hear a lot about the cultural problems associated with outsourcing, but they remain very understated," says Justice. "It involves much more than saying, 'In the U.S., we play baseball, and in India, we play cricket.'"
Justice describes the cultural gap as "a force multiplier of everyday problems" in the outsourcing business.
Doug Bettinger learned that lesson early in his three-year stint in Malaysia as a finance executive with Intel. "I was doing some things that were being interpreted in ways that were completely unintended on my part," says Bettinger, who now manages a finance staff located in Europe, India, the Philippines, and Los Gatos, CA, as the CFO of Bangalore-based Customer 24/7. "Folding your arms and pointing in certain ways can be considered extremely rude."

The cultural sensitivity he developed after immersing himself in Malaysia has helped to guide his management approach as an executive of an outsourcing services provider. Ninety percent of Bettinger's finance team is based in India.
Bettinger, who joined Customer 24/7 from Intel last fall, rotates the timing of his weekly staff meetings so that the meeting inconveniences only one staff location each month. "I've seen some U.S-centric companies make everyone adapt to U.S. time," he notes. "That doesn't work when you're managing on a global basis. You need to inconvenience everybody equally."
He also praises the asynchronous benefits of e-learning as a valuable cross-cultural training tool and emphasizes the importance of exposing leadership candidates to as many of the company's geographic locations as possible. "Your senior people need to have a perspective on what it's like in the other geographies," he adds, "to really un derstand the company on a broad scale."
That perspective can equip managers of overseas staffs with a keener ear. "Many of the current outsourcing venues — India, China, Uruguay, or Russia, for example — have found themselves uniquely fortunate to be where they are today," explains Bob Wesselkamper, practice director, international consulting services, Watson Wyatt Worldwide. "The professionals in these locations are therefore hesitant to say when something is wrong."

Wesselkamper, who has managed staffs in Manila, Lisbon, and Delhi, says that one of the biggest challenges of managing across the ocean is being able to hear between the lines during telephone conversations.
To help counteract a cultural reluctance to share bad news, Watson Wyatt managers supervising overseas staffs frequently identify "failure metrics" in addition to measures of success. "If the individuals know that if X happens the activity is a failure, it encourages them to be a little more transparent. The telephone conversations are also a little more productive."

Unplanned absences (in the remote office), producing the deliverables in an incorrect format, and specific productivity, efficiency, and profitability measures represent failure metrics that the firm uses. These barometers of failure are often discussed more vigorously than the success measures, says Wesselkamper.
"When everything is presented to you as rosy, you need to have enough knowledge and experience to detect when things aren't really rosy," he adds. "A successful consultant reads the culture and understands how to detect concern and anxiety to develop a true and accurate picture."

Squeezing the Middle

The next generation of consultants appears eager to develop those sensitivities and sharpen their intercultural management skills.
In August, The New York Times reported on an "invasion of India" by American business-school students. New York University, Georgetown, Wharton, Stanford, Duke, and Northwestern students performed summer internships in India. A Stanford Graduate School of Business student said that he worked as a summer intern for Infosys in Bangalore because he wanted to "participate in the workings of the global economy." He also confided that the experience would make his resume shine.

The ability to handle longer sales cycles is now a much more valuable line on the CVs of higher-level consultants. A consulting engagement of $500,000 to $15 million can be sold over the course of several weeks. Large BPO deals, whose value can exceed the $1 billion mark, frequently require a year or more to bring to fruition, notes Joseph.
"The process, deal structure, skills, and patience required in working with many different facets of a client organization to get a deal done are very, very different in the outsourcing model than they are with project-based consulting," he says.
Joseph reports that his clients in the consulting sector often find that their existing senior-level talent "is not positioned to address this new world of outsourcing."

That may be, McMann counters, but those sorts of selling skills cannot serve as the foundation of a successful consulting firm. "It's a contracting business," he says. "I know a lot of individuals who excel at this, which is great for them. You can get paid a lot of money doing complex contracts right now. But you can't build a national, integrated, intimacy business without a lot of smart, capable people."
McMann is concerned that firms that weight their business mix too heavily toward outsourcing will lose their top talent. "If your best talent thinks that they're going to be stuck in outsourcing deals, their interest will wane and you will get turnover. Which is harder, setting up a strategy to make the HP-Compaq merger work or putting in SAP at HP? The engagements may deliver the same value in dollars, but which one of those two guys do you want at the table?" He believes that the same question — with the same answer — applies to outsourcing.
Midcareer consultants face a different source of challenge as a result of outsourcing's rise. "I'd say the middle is getting squeezed," says Joseph. "Now it takes a more senior-level executive to correctly position, sell, and manage these large engagements, but it takes a more junior-level person — defined as lower-cost — to deliver the engagement. Those in the middle are having a slightly more difficult time."
Junior-level consultants also face some tough questions, says Justice: Can your job be documented, repeated, and executed without a lot of handholding? If the answer is yes, "you have people competing for your job who can do it cheaper," Justice notes. "That's the cold reality."
But with the threat also comes opportunity. "As the access to global technology and consulting skills expands, the need for individuals who can assemble accurate requirements grows."

And an angel upstairs somewhere will still have to send the wing blueprints down to the production team.

Sidebar: New Scores for Baseball and Cricket

As outsourcing grows, large India-based outsourcers and large U.S.-based consulting firms have their sights set on similar prospects. New research from a U.S.-based strategy firm suggests that the two camps have divergent incentives once they land a new business process outsourcing (BPO) customer.

Each camp competes in the same market from different positions. Wipro, Tata, Infosys, and other Indian companies generally are seeking to bolster their U.S. presence by establishing better consulting capabilities and more visible senior-level teams that can develop new markets and attract and manage new client relationships. The large U.S. firms with outsourcing offerings generally are hiring like mad in India and China to strengthen and expand their delivery capabilities (to leverage the strong, high-level, client relationships they already have).
New Katzenbach Partners research, based on the Relative Value of Growth (RVG) performance metric developed by Nathaniel Mass, offers BPO buyers a new approach to evaluating how an outsourcing provider will behave once a deal is signed. Mass, director of N.J. Mass Associates Inc., and Richard Schroth, founder and president of Executive Insights, Ltd., are the Katzenbach senior fellows who conducted the research with Roopa Unnikirshnan, a Katzenbach manager in charge of the firm's outsourcing and technology work.

RVG determines the degree to which a company is rewarded, in terms of market capitalization, for growth and/or profit margin improvement. Katzenbach research found that the Indian outsourcing companies have extremely high RVG figures, which, according to Mass's research, means that they're rewarded for growth. EDS, BearingPoint, Capgemini, Accenture, and other U.S. firms with large outsourcing practices have low RVG figures, which, according to Mass's research, means that investors reward these firms for cutting costs.
Schroth believes that BPO buyers should understand those incentives during their selection process and ensuing negotiations. "This is not a pro-India conclusion," he adds. "Both sides have strengths and weaknesses." Informed buyers, Schroth says, can monitor RVG to better understand the strengths and weaknesses to fortify their own hands during negotiations.

If RVG gains traction, U.S. outsourcers will be fielding more questions about service levels and value-added components while Indian outsourcers may have to demonstrate to buyers just how willing they are to please investors.