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Asian outsourcing giants have “naturally” moved up value chain as the industry and customer requirements mature, leaving low-cost services a small part of their business equation, according to an industry observer.

Pranabesh Nath, Asia-Pacific industry manager of ICT practice at Frost & Sullivan, told ZDNet Asia that outsourcing companies in Asia started out providing low-cost services that required fewer specialized skills. Over the years, outsourcing grew to become a big business in Asia with major outsourcing providers raking in “a billion-plus in revenues”, the analyst said. These outsourcing giants were able to achieve such revenues because they had since moved up the value chain, from providing “simple contact center services to end-to-end BPO (business process outsourcing) services” including analytics, finance and accounting, legal services and human resources, Nath noted. “In the end, focusing on higher-end services is a natural part of a company’s growth strategy,” he said. “An outsourcer grows by adding higher end services and as their reputation in the market grows, this helps them as well. Typically, larger companies would offer higher-end services with [the types of] service levels as the differentiating factor, while [smaller to midsize] companies would focus on basic services with cost as the primary differentiating factor.” The analyst’s comments were in response to a survey released in late-September which found that relying on low cost and labor arbitrage was no longer a successful strategy for outsourcing providers. Conducted by PwC and the Center for International Business Education and Research‘s (CIBER) Offshoring Research Network (ORN) at Duke University’s Fuqua School of Business, the survey noted that it would be critical for these service providers to identify ways to become valued business partners instead of just a third-party service-delivery company.

In spite of these survey findings, Nath noted that cost would likely remain the primary factor for companies to outsource since cost benefits were the primary reason the outsourcing industry was born. However, he agreed that as the industry matured, customers also had started to look at quality and service level as key factors for choosing the right outsourcing provider. This also had driven outsourcing companies with the right skills and vision to grow further, the Frost & Sullivan analyst said. With the global marketplace becoming more competitive in a difficult economic environment, he predicted that more areas of company operations which previously were done in-house, such as research and development (R&D), engineering and marketing, would start to open up to external service providers. Thus, large outsourcers would also move from providing simply IT services to offering more of such services, Nath added. An Asian outsourcing provider shared with ZDNet Asia how it looked to increase its value to customers. Vinod Kumar, managing director and CEO of Tata Communications, said the company did not compete on price alone. The Indian outsourcing giant also leverages its submarine cable network, Tata Global Network, and the nearly 1 million-square feet data center and collocation space it operates worldwide, said Kumar in an e-mail interview.

Diversifying Client Base

According to Frost’s Nath, established outsourcing companies increasingly were diversifying their client base geographically, especially amid the uncertain U.S. financial climate. Thus, he noted that more Asian outsourcing providers were looking to Europe as well as emerging regions such as other Asia-Pacific markets, especially domestic demand in China and India, as well as other regions such as Latin America or Japan. He added that this trend would be further fueled by enterprises in emerging markets becoming more open to outsourcing their non-key operations.

Kumar noted that Tata ensures its eggs are in more than one basket by investing in “building global expertise from day one so that it can offer relevant services in-country”. He pointed to the March 2011 launch of InstaCompute cloud services in Singapore, which was available six months after its Indian launch. Nath added that Asian outsourcing providers were adding value to their services by taking over their client’s entire business processes such as the finance or human resource operations to forge long-lasting relationships. This would require having extensive domain knowledge of a particular industry sector, he said. “So an [outsourcing provider] that wants to do this will need employees with high skills level and who understand both the industry sector, such as banking, as well as the technical know-how of the work,” he said.

In contrast, new market players would find it difficult to provide such services and instead focus more on offering lower-cost services, which would attract clients from small and midsize businesses (SMBs), the analyst explained. “So, in the end, while a large [outsourcing company] can effectively compete in both categories, a smaller [outsourcing provider] can only compete effectively in the value category–unless it has very specialized skills,” he said. He added that there was potential for “boutique” outsourcing companies, which specialize in particular services such as R&D or marketing, to grow on a larger scale in the near future.

Via ZDNet