The Economist’s article Replacing the board took me to the history of outsourcing and the way it has evolved with time. The internet proliferation, aided by the opening up of the labour markets, brought about a drastic change in the business models of the Western organisations, which came to rely on cheaper yet labour-intensive menial tasks to be outsourced to the East.
With such rapid change occurring in the East, the West wasn’t sipping a mojito relaxing on a hammock in Hawaii either. With its labour-intensive operations outsourced, it began to focus on more high-value tasks as more time was available to its employees with the burden of operational nitty-gritties lifted from their shoulders. Research and development, innovation, ideation and strategy formulation were still areas that the West prided itself on and retained control of.
Consulting firms such as McKinsey, Boston Consulting Group and others provided their strategic guidance to organisations willing to go global and reduce operational costs. These firms provided high-level consulting to organisations to fulfil their aspirations, leaving out the arduous implementation of these strategies to service firms in cheaper labour economies. The West focused on strategy and the East focused on outsourced work.
With the rapid development of skills in the East, however, the labour markets began to establish themselves in niche areas of the market, bidding for more high-value work up the ladder of outsourcing. Indian IT firms bid for consulting engagements (albeit IT Consulting) and began to increase their price arbitrage for these engagements. The entry of these companies into the field of consulting had intensified competition for clients who could not afford McKinsey-level budgets but who needed the guidance and expertise of external firms.
[Companies have] contracted out everything from manufacturing to strategy-making. Yet when it comes to boards they have been astonishingly conservative.
Today, the gamut of services offered by most Indian IT firms extends from Business Process Outsourcing and Back Office operations to Knowledge Services and Strategy Consulting. The field of management consulting is no longer confined to the bigwigs of the West. The widespread use of the internet has increased competition even in hitherto nascent markets such as e-commerce and social media.
As organisations across the globe climb up the ladder of outsourcing models, we have now reached a phase of “board outsourcing”. The transition from outsourcing tasks such as data entry to outsourcing strategic guidance through the board of directors has been relatively quick but glaringly notable.
The outsourcing industry has changed its shape too. What earlier constituted as delegation of tasks to cheap labour economies has found new models. American firms outsource menial tasks to other American firms and Indian firms do the same with other Indian firms.
The model of outsourcing has reached the hierarchy of the board now. Board Service Providers, as part of the solution proposed by Mr Bainbridge and Mr Henderson, might become the norm. Board insights might soon become the forte of BSPs, with an increased reliance on external entities with minimal attachment to incumbents and an objective perspective to business.
The resulting question is interesting – what next?
With the board also contracted out, which segment of the hierarchy of organisations remains? To use Samsung’s tagline, next is what?
The value chain of outsourcing does not seem to have any further hierarchies to take. If boards get outsourced to newer BSPs, the day is not far when the McKinseys and BCGs of the world seem like TCS and Infosys (unless of course everyone innovates to operate in the newly opened niche market).
There is significant resistance to such changes, however. Industry-changing ideas may get snubbed and conflicts of interest might arise between BSPs working for different firms in the same industry. But that is nothing new for existing management consulting firms, which often face such challenges and operate successfully nonetheless.
A new model of outsourcing will evolve and business models will adapt to it. There is still time till such a proposal becomes mainstream but the time to adopt this impending change is now.