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Satyam's Crisis Will Spawn New Outsourcing Models
Posted by Marianne Kolbasuk McGee on Jan 28, 2009 03:54 PM
In the past, IT services vendors often resisted terms clients tried to include in their offshoring contracts. But in the aftermath of Satyam's financial fraud mess, outsourcers will be more willing to bend on client demands, especially if they're anxious to pick up work from Satyam's ex-customers.
"Outsourcing is not going away," says Shaalu Mehra, partner at Silicon Valley-based law firm Perkins Coie, in an interview with InformationWeek. However, new outsourcing models and a shift of power to clients will soon emerge post-Satyam scandal, predicts Mehra, who is chair of Perkins Coie's outsourcing and India practices.
One model Mehra thinks will gain traction is "build, operate, transfer," he says. That's not a brand new concept in outsourcing, but it is a model that vendors have traditionally fought against, he says.
Build, operate, transfer -- or BOT -- is akin to leasing a car and then buying it from the leasing company for a few bucks once the lease is up. Under BOT, IT vendors "build up offshore operations for a client, run it for some time as a separate business unit or subsidiary, and then transfer the operations or allow the client to acquire the unit at the end," he says.
Most large Indian vendors have long "pushed back" on this BOT model, especially when their services businesses were growing rapidly. The BOT model is viewed as a detour away from vendors' expansion plans, he says.
"But there will be a re-emergence of this model in the wake of Satyam," especially as clients look for reassurances from their IT services vendors about business continuity in a crisis, he says.
Traditionally, it tended to be smaller offshore companies that were most willing to participate in the BOT model, as they were generally more desperate to attract customers. Top tier Indian outsourcing firms on the other hand rarely agreed to BOT terms, he says.
Along those lines, clients also will likely gain more leverage making demands regarding the transfer of talent in their outsourcing arrangements. That could include clients being able to hold on to certain talent at the end of an outsourcing relationship, or restrictions on the vendor transferring key talent to other accounts, he says.
Finally, moving ahead, outsourcing contracts also will likely provide clients with a "wider scope of auditing rights," Mehra predicts. Clients will want the ability to more closely scrutinize the financial viability of outsourcing firms, he says. "My expectation is that clients will want to see more," he says.
Some smaller IT services vendors already are sticking their necks out to provide an extra dose of confidence to clients. Just the other day, Alliance Global Services, a Philadelphia-based firm that has operations in India, proposed that the IT services industry embrace a standardized code of ethics, or an "IT Partner Bill of Rights" to help ease outsourcing fears.
What scares you most about outsourcing? And what can vendors do to calm your fears?
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