The Future of Business Process Outsourcing

Mar 2nd

The Disadvantages of Low End Outsourcing

My History of Outsourcing

Last year I lost thousands of dollars multiple times outsourcing projects to people who could "do them no problem" until time for showing the results came in, and that capital was simply wasted. At the lower end, where people will take your money and do nothing for you or offer services not worth paying for, there will always be a market where people are glad to take your money.

That piece of the market creates a market for lemons effect, be it SEO, web design, programming, eBay listings, whatever.

The Cost Advantage of Outsourcing is Quickly Eroding

Not only is there a market for lemons effect, but the cost savings advantage is quickly eroding:

The reality is that wages are rising in India. The cost advantage for offshoring to India used to be at least 1:6. Today, it is at best 1:3. Attrition is scary.

Jobs that are low value-added and easily automatable should and will disappear over the next decade.

That means that if you provide a high value service, there is a greater presumed risk to hiring you, unless you have great brand strength and/or enjoy valuable personal recommendations. Worse yet, if the job is easy to automate eventually a computer will do it.

The Problem With Most Outsourcing Projects

Many people who look to outsource have a marginal business model and are outsourcing rather than improving their business model, in a last ditch attempt to try to keep it surviving after the business model is already in decay, without changing their business model to fit the current marketplace.

High End Business Process Outsourcing

You Can't Outsource Loyalty

At the other end of the market, some of the most talented people are also so ambitious that loyalty or output is limited. When I decided to change the SEO Book business model about 6 months ago I started working with one of the best programmers I have ever met. He did great work and started off faster than lightning, but he wanted to grow his revenues so fast and was so overwhelmed with work that he had a hard time making time for my project. In spite of me sometimes paying him 250% of his original rate, he and I both decided that it would be best if I finished the project with someone else. So then I ended up spending thousands more to have some re-learn some of the stuff he did, and then create custom coding to

  • verify the affiliate program would work and give the proper affiliate credit while changing the tracking method
  • cross reference account status and permissions across 3 databases
  • integrate it all with Paypal subscription data

There are still a couple things with the site that I really need to improve (Drupal FlashVideo conversion and some stuff with the Autoresponder module), and that does not even include additional features I want to add. The second programmer is helping with some of it, I am doing some of it, and a third programmer is helping with some of it.

Freelancing to Pro: Training Your Workforce for Better Jobs

I outsourced the writing of one of my sites to a person who was passionate about the field. I let them be associated with the brand and put their name on it so they would be more passionate about building it up.

I have marketed the site quite aggressively and gave them my ideas for how to create featured content and what topics to write about. That has lead to them getting so much exposure that other people are offering them higher paying jobs.

There is an aspect of outsourcing where if you teach them enough and give them enough exposure they end up being worth more than you can pay them unless you already have a market leading channel.

When Outsourcing Works Great

Pre-made & Self Serve Software Packages & Services

All the above models work so well because they

  • allow a single piece of work to be sold many times
  • use the feedback of many customers to improve the product

Word of Mouth Recommendations

  • All my hosting providers that I recommend were recommended to me by other online friends.
  • I have a guy who makes banners for me who is fast and does great work. He was recommended by a fellow SEO.
  • My designer for this site and other sites came as a recommendation from other friends.
  • Most of my other custom service providers are people who read this site, learned to trust me, and built a relationship from there.

My wife and I have only bought outsourced services via word of mouth recommendation that I ended up regretting on 2 occasions. In both cases, the person giving the word of mouth marketing was recommending themselves. Other than that, I have rarely had a bad experience with word of mouth marketing. And I think this is true for two reasons

  • you first learn to trust the source, and they earn that trust over months and years
  • then you trust what they recommend

Spreading that risk out over stages lowers the chances of making a bad choice.

How to Continue to Profit as an Outsourced Service Provider

Seth mentioned this Gavin Potter quote a couple days ago

The 20th century was about sorting out supply, the 21st is going to be about sorting out demand.

As the cost advantage of outsourcing disappears, the web gets polluted with scams, the web gets saturated with competitors, and more offline conversations influence online transactions, it seems the best ways to make money outsourcing are:

  • work to build some of your own projects so you are not reliant on clients
  • specialize on a niche and own the idea
  • build a brand that demands market leading rates
  • give away a lot of value free to do your marketing for you and qualify your prospects
  • inspire customers and ensure you offer a remarkable valuable service worthy of word of mouth marketing
  • turn your service into a product that is sold as a service, and include customer interaction touch-points where it makes sense to add value
Published: March 2, 2008

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Comments

March 2, 2008 - 1:33am

I like how you whittle down what works to two things, using the word of people you know and relying on the loyalty of your staff. It's too bad you lost so much money in the process. I found much of my business comes from prospects who know my current clients and have been recommended by them.

March 2, 2008 - 4:58am

I have been doing freelance work for almost two years until recently when another company offered me a deal I couldn't resist.

March 2, 2008 - 10:12am

I would advise anyone to be very cautious before outsourcing - particulary link building projects to Indian firms who apparently offer 'excellent services'. 90% of the time these firms lack professionalism & have a passion for link spamming.

March 2, 2008 - 12:23pm

Bang on Aaron.

No one could have said it better.

March 2, 2008 - 4:45pm

I think you have some great insight on a lot of subjects but I think this is the case of confusing a few different subjects.

There are really 3 different topics that you're grouping into BPO - BPO, offshoring, and hiring a vendor

BPO and offshoring are 2 different activities and shouldn't be confused with one another. So while the price efficiencies of offshoring are eroding, it doesn't necessarily mean that BPO won't work. The idea of BPO is about not having to actively operate part of your business so that you don't have to work on it. Yes, it could affect some of their prices but even if their costs are still onshore, a good BPO firm will make you more productive by not having to manage that part of your business.

But I think the biggest problem with the argument is confusing "hiring a vendor" with business process outsourcing. BPO is not a one-time task. It is something that a company does consistently for your business. So if you are hiring someone to develop functionality in your website, you are just hiring a vendor, not outsourcing your business processes. In the name is "business process", which means these are processes that are executed over and over for you business - making one-time changes to your website are not business processes.

I think you're referring more generally to "outsourcing". And I agree with you that there are always going to be issues, but I think that outsourcing is just a "World is Flat" way to say "hire a vendor". People have always had issues with vendors not providing service at the level that they want. Anyone who does not have vendor or supplier issues is not running a business of any size. So I don't think it's anything unique that hasn't showed up since businesses started working with other businesses.

I just don't want people to miss out on some great efficiencies of running their business because vendor issues were lumped in with a much more brand idea(and efficiency tool) of business process outsourcing.

I pretty much covered my thoughts here but I added a bit more context when I say business process outsourcing is not dead

March 3, 2008 - 12:30am

Well the business process I speak of, in some of those instances, were to build (AND maintain AND refresh) complex data tools, but the initial results were so bad (ie: like them firing all their employees and still insisting on keeping my money without finishing the project) meant that there was no process to maintain. Other than theft.

March 3, 2008 - 1:08am

I have found,
"Pre-made & Self Serve" like Paypal, etc good, after they become a standard. However, boilerplate systems like Wordpress or Content Management Systems have been discontinued by our company as bad SEO.

I have an India person who has worked for me for four years, he live in Goa, India. I went to Palolem Beach, went and asked around for PHP people. I was lucky, but also insightful, I do not go searching for people in places like Bangaglore, or Hyderbad, Silicon Valley for workers.

The people in those places already are not loyal, want to get rich fast. We are going to hire about 5 PHP people this years from either India or the Ukraine area of planet.

1. I will look for people from remote areas.
2. Not too experienced, people who can learn and want to work.
3. Starting pay is about 400-800 per month on salary.

The pay is after they finish, there is no way to pay India or these under-developed countries in advance.

I have an online jobs thing, not developed, but works to find the large sample I need to find a working situation.
Andy of HoboTraveler.com HoboHideOut.com
In Korea Airport

March 3, 2008 - 5:07am

I personally think outsourcing works better if the work is outsourced to a company rather than an individual. A company with some reputation behind it [or even a relatively small company] would be a better option than outsourcing to an individual as there is usually more accountability involved. If you find things not moving in the right direction, the company you're dealing with should be in a position to allocate the work to someone else in their team who's more capable of handling the project.

Yes, outsourcing to a company as compared to an individual may be a little more expensive but the benefits of convenience, peace of mind and better quality could well be worth the price difference. Also, I think it's easier evaluating a company than an individual.

Just my 2 cents!

March 3, 2008 - 7:15am

This is at Sphinn, courtesy of yours truly: http://sphinn.com/story/32146. Go Sphinn it!

March 3, 2008 - 6:20pm

I think you're hitting the nail on the head in regard to price rises. As you know Aaron, I'm out in Russia and we've seen them shoot up.

Where we are the bottom rate is now $1k, usual is $1.5k - with Moscow jobs often starting at $3k. To put it in perspective people expected $200-300/month when I got here 3 yrs ago.

Personally I think a lot of the small companies/one man bands have been priced out of the outsourcing market here. Maybe there is still options in India but in Russia you're certainly not getting quality at low prices.

Of course you can sometimes get lucky and find people who outsource in the evenings to boost their income but you never know how available they can be.

March 5, 2008 - 2:08pm

I think there is a lot of good material here and I certainly enjoyed reading it. Like Lazyowner I had an immediate urge to write down some of my experiences in outsourcing to India.

If I had to distill it all down, though, I would say that if you're not going to make a big investment (time, $$, focus) then you'll need someone who understands your problem domain and how to get stuff down properly in an outsourced situation.

And while my article is specifically about India, I have to say that everything in there (except Delhi Belly!) was true when I was leading distributed teams with significant resources in Australia, Singapore, and Brazil.

-OT

March 8, 2008 - 9:44am

I lost thousands of dollars multiple times outsourcing projects to people who could "do them no problem" until time for showing the results came in, and that capital was simply wasted

A simple crash course on project management should help you work around this. This wouldn't happen if you tracked progress on the project. If, at an earlier time (than the proposed deadline) you are not pleased with the progress on your project, fire them - this saves you valuable time and money.

July 24, 2008 - 4:15pm

Regarding outsourcing PSD to HTML the most affordable service for freelancers with high-quality slice in 24 hours for me mydesign2html.co.uk

July 25, 2008 - 1:13am

Hi Andres
Where did you find out about them? And are you affiliated with them?

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