Labor Arbitrage Models Will Fail

I wrote a blog in the BPO network with the same title – but as I pondered it applies to the off-shore development market as well.  In the BPO blog I staretd with “BPO initially started with the need to focus on core services, but economic benefits were quickly realized as BPO providers gained economies of scale and scope. The prevalence of BPO quickly became one of labor arbitrage. Although many BPO providers are focusing on value and moving away from just cost advantages, a majority of them still rely on the labor differential. In my view, this approach will fail. Not just for the rising labor costs, but the way people are getting help is also changing.”

Upon reflection this is equally true for off-shore development.  Global providers have not only moved away from the one or two country source models to multi-country (IBM and Tata are great examples), but they have also moved up the food chain.  One project I helped in determining the best sourcing strategy was decided not on cost alone, but deep expertise in the CPG (Consumer Products Group) industry.

The key here is that service providers should be looking at the business model, their target markets and build systems and processes that can be readily adapted to different verticals. To achieve this, they must develop innovation groups and fund them internally. R & D is not just for product companies, services companies must have R & D groups completely distinct from operations and projects to help the firms stay competitive.

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