Outsourcing’s Double-Edged Sword: Trust

The lack of trust in the accuracy, frequency and depth of financial reporting processes in companies has spawned a sizeable industry that has trust at its cornerstone. Sarbanes-Oxley’s pain is the outsourcer’s gain, and in this strengthening reciprocal relationship between the need for U.S. publicly held corporations to comply with SOX on the one hand versus fixing antiquated and broken processes that drain profits on the other, many companies are coming down in the middle, doing them both at the same time and outsourcing it.

Profiting From Compliance

The perfect storm has emerged for outsourcers. Due to all public corporations’ officers fearing and loathing at times the adherence required for SOX and not really wanting to become experts at interpreting, then implementing its requirements, it’s much more efficient to outsource it.

Infosys, in reporting its latest financial quarter, states that there was a 35 percent jump in profits due primarily to additional work on SOX, and many others are mentioning a 50 percent figure in their earnings announcements. Of the companies that didn’t get a rise in profits purely due to outsourcing, their explanation is sales cycles are longer due to companies looking to combine infrastructure, finance and compliance work all in the same project.

Growing Pains

For all the hype these companies get in the press, they still have their share of tough challenges ahead. These include the following, some of which were brought up in their calls and in their documents:

• Taming the turnover Tiger. This is a huge issue when it comes to their collective credibility. With turnover being well into 70 percent for SAP ABAP programming expertise, for example, there is a major problem with the most in-demand professionals literally going down the street for a major jump in salary.
• Show me the rupees. This is the price of success for many of these firms. Their best talent wants U.S. salaries, and as a friend who is an Indian citizen told me after spending six weeks there this summer, of the highly paid programming talent, “they live like American multimillionaires.” He was amazed at the influx of new wealth in his home country.
• Microsoft, Oracle and SAP enterprise apps expertise rules. I belong to several newsgroups that track these companies, and the purpose of the news and discussion groups is to track what’s new on these platforms and advertise for talent. Just this morning five different postings came from a company in Bangalore looking for someone with Oracle order management expertise. Compound this over a quarter and you can get a sense of what the demand is.
• Global search for talent continues. Infosys has close to 40,000 employees worldwide today and just announced this week their plans to set up two new software development centers in China, employing an additional 6,000 and spending US$65 million in the process.
• Selling the end-to-end solution and getting the least risky processes as business. This is the most challenging aspect of their collective long-term business models. Infosys, HCL, Tata and others continue to recruit heavily from U.S. and UK-based system integration experts who have proven expertise in delivering end-to-end solutions, like order management for example. Yet there are very few companies stepping up and letting outsourcers handle an entire process — most are hedging their risk and handing over the least risky of projects. This is especially true in call center outsourcing, where the home-based call centers are getting rejuvenation due to language and voice accents alone.

  In a move to bolster the ability to sell end-to-end solutions, Satyam purchased Knowledge Dynamics, a Singapore-based business intelligence consultancy for $3.3 million last month.

• Playing the currency game. As the rupee strengthens in value relative to other currencies, these companies pay the price. No wonder Infosys is being very aggressive about moves in the UK and Europe; the British pound and the euro are two strong currencies that can hold up well against the rupee, and even better, give these companies a strong cost advantage.
• Political backlash and protectionism. In a sense, the Indian outsourcers have found a strong lobbyist in the value proposition of dropping development costs by 40 percent or more, delivering compliance solutions efficiently and economically, and in general promising and delivering cost savings globally. Their lobbyist is the dollars they promise will be saved.
• Breaches of security and confidentiality. There have already been several incidents of customers’ confidential data being comprised, and one UK news organization actually did a sting operation on this and was able to get confidential data easily. Dismissing this as not significant is like saying when someone else’s car gets stolen it doesn’t concern you, even though you were parked right next to them. This is the Achilles heel of the entire outsourcing model. Think of it — an industry that is growing quarter-over-quarter due to a lack of trust in one part of the world while playing with the trust of their clients today. All other factors can be fixed, but a breach of trust here will impact the entire model for years to come.

Bottom line: Outsourcing is passing through a crucible of trust right now. How it emerges dictates global information spending for years to come.