In recent month’s I’ve noticed some things are changing with our business. At first I thought they might be ephemeral but I no longer think so. To state the very obvious, things are getting more global – a change we’re seeing in a number of ways.

First, we’re doing more work in foreign languages. I just totted it up and worked out that we commonly work in about 20 languages, including most of the European ones and many of the Asian ones too.

Some of this is driven by requests for overseas research as companies in our traditional markets (the US and Europe) look farther afield for opportunities, investigating markets, local companies and competitor activity generally. We find companies are also looking to emerging markets for inspiration, innovation and ideas on new trends they can exploit back in their home territories. All of this requires that we track news sources in foreign languages and bring insights back into English.

Perhaps most interestingly, for the first time we are being approached by companies overseas (in Japan and China mainly) who want research on Europe and the US. Topics vary but they cover the usual range of competitor intelligence issues – consumer trends, innovation, market size and growth rates, competitor activity and the like. Clearly, the tide is slowly starting to turn.

There is an upside for us in all this as growth in foreign language work is one of the reasons 2011 is, so far at least, going well for us. Q1 is up over 30% on last year and the 5-year CAGR is now nearly 25%.

I’ve failed to blog this year because I’ve been too busy; at least that’s my excuse and I’m sticking to it! Business is up (about 50% on last year) and it’s been hard to get space to take a breather.

I’d like to be able to claim credit for this upswing (one of my roles is to get new business, after all) but I can’t – it largely happened without my doing. In fact, there seems to be an inverse relationship – the less I try to sell the more work comes in; it won’t be long before someone cottons on to this and I’m put out to pasture.

So what’s behind this? It doesn’t really make sense – the US economy (still by far the largest source of our business) remains moribund, companies continue to cut back and the general push to make savings by outsourcing to low-cost countries remains the orthodoxy.

A couple of reasons are that I think we do a good job (hey, you’d expect me to say that!):

• We have a good team that does quality work. We get to know clients, our churn rates are very low, we have very experienced people etc – these are the minimum requirements in today’s environment and we tick the boxes.

• We’re easy to work with –no minimum commitment, we do a whole range of services so can help out in many ways, we’re very reachable and responsive and while we’re not super cheap, we’re not super expensive either.

But there are three other reasons I think are at play, driving work our way:

• Clients are overworked
• Indian-based vendors are getting more costly and often still miss the quality mark
• Corporations are increasingly turning to contractors and project based work

Clients are overworked

No surprises here. Over the last two years they’ve cut to the bone and people that remain are working harder, longer and need help. Companies don’t have the bandwidth to train lots of people or vendors and are happy to turn to an external vendor they can trust.

Indian vendors are getting less attractive

Let me say upfront that I have nothing about work being conducted in India, in fact I think it’s often a great idea – we have a good number of people there that work for us, and so I know the benefits. But I also see some of the downsides and I think increasingly clients do too. This is what we hear:

• Outsourcing to India is no longer the bargain it once was. The Rupee/Dollar exchange rates continues to pressure Indian providers (their costs are in Rupees but their income is usually in US$). Since Jan 2009, for instance, the dollar rate has fallen from nearly 52 Rupees to about 45 today, a 14% fall, continuing to erode their cost advantage
• Vendor rates have also gone up as companies try to move up the value chain
• Quality remains an issue, especially in areas of writing and services that require cultural insight (marketing, advertising, trend work etc)
• Churn rates are high and clients are fed-up at having to train and retrain.
• Minimum FTE (full-time equivalent) commitments are off-putting

Here’s an anecdotal example of how things have changed. Over the last month we’ve been recruiting to create a team of five writers for some newsletter work we have. We’ve advertised on online job boards, used Elance, Guru, and leveraged our own teleworking database at ClickNwork and reviewed in detail over 200 applicants from a pool of well over a thousand. In previous years I’d have expected Indian freelancers to be amongst the cheapest, but today its people in Pakistan and Africa (I’m sure they’d have been cheaper a few years ago, but they just weren’t as connected then); good Indian freelance writers are today seeking rates comparable to writers in the US, which would have been unheard of just a few years back.

Shift to contract work

Last, companies are getting used to using contractors. This has been going on a while but the recession gave companies a great excuse to cut back, and instead of hiring back, they’re using project-based, contingent labor. A couple of stats:

• An April 2009 report (“The Emerging New Workforce”) by Littler Mendelson, one of the largest employment law firms in the country, predicted that following the end of the recession, “50% of the workforce added in 2010 will be made up of one form or another of contingent workers. As a result, approximately 25% to as high as 35% of the workforce will be made up of temporary workers, contractors, or other project based labor.”

• This isn’t just unskilled labor; it’s increasingly the domain of professional work. This chart, that comes from Staffing Industry Analysts, via Little, makes the point that over time, spending on contingent labor has increasingly been for professional skills (“Commercial” = Office/clerical or industrial)

• Analyst Christopher Dwyer of Aberdeen Group believes such workers already make up 20% of the labor force, a figure that will rise to 25% as early as next year.

Put it all together and you have companies overburdened, looking for different solutions than putting more work over to India and an emerging acceptance of project-based work completed by a growing cadre of temporary professionals.

I’m not a great one for anniversaries but I thought I’d mark the fact that Business360 kicked off ten years ago this month.

It’s been an adventurous time. We started right as the dot-com boom peaked (the market turned in March 2000), sucking away financing options for start-ups, and soon after that 9/11 helped tip the US into recession in 2001. And here we stand today, slowly riding out of the worst recession since the Great Depression. How’s that for timing!

But while we haven’t attained Google-like growth, we’re doing fine: our client base is up, revenues are rising and with new products and services about to launch, I think things look better than ever.

Looking back over a decade you realize how some things have changed and here are a few that strike me:

• We were a crowdsourcing innovator. We didn’t think of it as crowdsourcing at the time (it was 2000 and the term didn’t exist) but it turns out one of the first services we offered relied on an early form of crowdsourcing – we opened team rooms to let people from all over the world compete to answer business questions our clients had, selecting the best material located. It’s something we still use – when you have a tough question you’re researching on the web you often get a better result, and much faster, if you have 10 people searching for it rather than just one – this is true even in these post-Google days.
• Outsourcing research/writing/analysis is now commonplace. Earlier this decade there was a lot of noise about companies outsourcing information and research services. Much of it centered on whether it was wise to outsource and the prevailing view from professional researchers in the US and UK was that it wasn’t, that it would destroy the profession and yield poor quality results. Today, these concerns have largely gone; outsourcing of these functions is now standard practice and large companies that outsource this work are way more common than those that don’t. That’s not to say that it always works – there’s a lot of work that shouldn’t be outsourced and even more that shouldn’t be offshored, but that still leaves an awful lot of work that is best completed externally.
• Outsourcing research trials have gone away. Over the years we’ve been involved in a good number of trials, usually competing against our competitors, although we sometimes didn’t know that until after the fact. The most rigorous by far was run by Goldman Sachs – it lasted longer, took in way more vendors and systematically covered a lot of territory (and I’m pleased to say that we came out top on this one). Other trials that we’ve taken part in were very poorly executed, some entailed just a small number of tasks, some imposed silly restrictions, like preventing vendors from discussing requirements with the requestor, or disqualifying certain sources etc – some of these we won, and some we didn’t. We don’t see many trials these days. Things proceed more organically – companies ring us up and we talk about what we can and can’t do, and the usual course is to gradually get to know each other on a number of projects. Things normally grow from there.
• You don’t always need financing. As a company we never secured formal financing – we had a small amount of seed capital and a family member put in a little too. Instead, we’ve bootstrapped. We watched pennies and grew as our clients started to trust us and gave us more work. And that’s largely how it is today. Most of our work is repeat business and most new clients come from personal recommendations. All of which has meant we’ve learnt to be very flexible and responsive, and that’s been a good thing – giving clients what they want, how they want it, faster, cheaper etc has pushed us forward. On the flip side, lack of capital has meant we let a lot of good ideas slip by.
• Virtual working and working from home are now well-established. When we started, the idea of building a business where all the work is completed remotely, with everyone working from home, was offbeat. More radical was the idea that we could deliver high quality services to top companies with teams of people assembled from around the world that never meet, don’t talk to each other and don’t talk to us or the client. I still find it shocking. To be sure, there is a lot of communication with clients and between a lot of people at Business360 and ClickNwork, the site we built to manage workflow, but for many things we do communication beyond email or IM isn’t needed. So, for example, we have researchers and writers that have been with us for five or more years and that work with us on a daily basis, but who we have never met or spoken to, not even over the phone. But with good online and email based training these people deliver services (research, data gathering, data entry, some document preparation…) to Fortune 100 corporations, banks and hedge funds. That still strikes me as radical. Something I want to do in the couple of years or so is go on a tour to visit a lot of these people and see how it all happens – that would be interesting.

One constant throughout the decade has been rapid change and we’ve had to evolve fast to keep relevant. On that score we’ve been investing a lot in some new ways of doing things and we’ll be pushing some of them out the door soon. In another ten years time I’ll be able to say whether they were a success or a flop. Stay tuned!

I was talking to a client the other day who had read my last blog entry (imagine, a reader!) and who pointed out that a bunch of the work they had given us was a direct response to the recession. Recession as demand driver, funny. But it’s true. I went back over the last six months to look at the work we’ve been given that stems directly from the recession, and it’s a bunch, about 20% of what we’ve been doing:

First there’s ongoing tracking work – as the downturn got going a few clients asked to keep tabs on specific issues such as the actions of competitor companies, core sector news etc, so on a daily and weekly basis we’ve been:

- Capturing and distributing articles that look at competitor response to the recession (price movements, packaging changes, cost-cutting drives, marketing campaigns and so on)

- Preparing newsletters that contain summaries of the more significant developments. Most of these are sector specific, so, for instance, one looks at how all the large consumer goods companies are responding

- Writing monthly and quarterly sector reviews that largely summarize the findings of the above two

- Preparing monthly economic reviews that pull together historic and forecast economic data, sometimes with summaries of competitor actions

And then we have a bunch of ad hoc work that roughly groups under these themes:

- Lesson capture – looking at past downturns and pulling out insights that can be applied today – Do companies do better when they acquire during downturns or upswings? Is it better to cut deeply and early or hold out for smaller later cuts? Do innovation and new products pay off better in recessions? What role can messaging alone play as consumers pull back on spending? There’s lots of it, and coming from many angles.

- Impact studies – trying to gauge the changes underway, where they may head and how profound they will be. We’ve done these for a range of sectors – real estate, homebuilders, banking, personal care and food – but they almost always point back to consumer demand and changing consumer attitudes.

- Bankruptcy studies –  looking at different sectors to identify weak players and likely bankruptcy candidates, which we do using things like asset impairment rates, debt maturities,  cash flow analysis, Altman Z-scores, leverage and coverage ratios, bankruptcy ratios, going concern metrics etc.

- Trend analysis – trying to get a sense of how things are evolving, how fast and in what direction. Trends are capricious things and this work is more art than science, so we often back it up with site visits and interviews (for example, we’ve been doing a lot of looking at Japan lately, most recently seeing how companies communicate to consumers fatigued from its lost decade).

- Future views – thinking about how the commercial landscape will change, how attitudes will diverge from previous trends, assessing what consumers will be looking for, judging which players will fold, which will conquer, and so on. It’s sort of reality-based navel gazing.

And here’s a funny thing – the first recession-based work we were given happened over a year ago, in January 2008. Things were fine then (consumer confidence was high, GDP growth strong, unemployment low and so on), but some of our clients were seeing weakness in parts of their business and, interestingly, the National Bureau of Economic Research (NBER) dated the onset of this recession to December 2007, although they didn’t announce it until December 2008. Here’s betting that in the next couple of months we’ll get our first assignment looking at ways of how to profit from an upturn that comes on the heels of a sharp contraction. And that will be a good thing.

I was expecting 2009 to be a terrible year for Business360 (it may be yet!), but so far business is surprisingly strong. We are up on last year, two of our top three months happened this year and the pipeline is looking fine.

Sure, we’ve had some disappointments. Some clients have pulled right back (especially banks and hedge funds), some have asked us to lower rates (sometimes we can, often we can’t), some have reduced the amount of work they send us, but most clients are giving us much the same or more, and at the same time new clients have come to us (ad agencies, professional service companies, large corporations…), and these new clients have generally given us a lot of work. Go figure!

I think part of the story rests in clients cutting back on their own payroll and needing vendors to help out, but I think a more significant explanation is that companies are really reluctant to cut back on research. I’m afraid I can’t claim this insight as my own; the light bulb went on last night when I read an article in the April 20, 2009 edition of the New Yorker, by James Surowiecki in his column, The Financial Page, called Hanging Tough.

Surowiecki points out that

“…numerous studies have shown that companies that keep spending on acquisition, advertising, and R. & D. during recessions do significantly better than those which make big cuts.

In 1927, the economist Roland Vaile found that firms that kept ad spending stable or increased it during the recession of 1921-22 saw their sales hold up significantly better than those which didn’t. A study of advertising during the 1981-82 recession found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets. And a McKinsey study of the 1990-91 recession found that companies that remained market leaders or became serious challengers during the downturn had increased their acquisition, R. & D., and ad budgets, while companies at the bottom of the pile had reduced them.”

Of course, advertising is a little different from R&D, but a lot of our work comes from consumer goods companies conducting market research, or trying to get consumer and brand insights, or from ad agencies wanting a better story for a new business pitch, and good research is an essential part of all of these.

If Surowiecki is right then the companies that will emerge from this downturn strongest will be those that continue to invest, looking for better ways to help their consumers – using research and analysis to identify opportunities, and marketing and advertising to communicate them.

We had a little bit of good news this week – we’ve been asked to take over some outsourced research for one of the world’s largest advertising conglomerates. That makes it sound like a big deal but it’s not, at least not yet – it’s perhaps 0.5-1 full time equivalent, but hey, it’s something, especially in this environment!

The significant thing is that the work is now coming to Business360 instead of an Indian-based supplier that had the contract for a number of years, which means the work will now be completed by US-based researchers working from home. It’s not much, but if every company in the US did the same we wouldn’t be in a recession!

I don’t have the full reasons that the client changed but I gather we’re about the same on price but the advantage of having the work done within the same time zone and by experienced researchers (professional librarians, corporate librarians and the like) made the switch worthwhile.

The other day Gartner came out with its top 30 offshoring destinations. Unsurprisingly, India is the front runner but the range of choice is impressive:

New contenders are emerging to challenge the Bric (Brazil, Russia, India and China) countries’ dominance of the offshoring market.

While India was the “undisputed leader” followed by China in the list of the top 30 offshoring destinations, as compiled by analysts Gartner, this year’s list showed Mexico, Poland and Vietnam pushing their way up to take them on.

Ian Marriott, research vice president at Gartner, said these countries would be seeking to take advantage of the credit crisis to capitalise on organisations’ drive to save costs

You can see Gartner’s list here and some commentary here.

Around the same time the UK’s Computer Weekly came out with its Top five outsourcing destinations to watch for IT services and outsourcing. IT outsourcing is very different than BPO, but where IT leads, BPO often follows. Computer Weekly’s top five are:

1. Argentina

2. Bulgaria

3. China

4. Egypt

5. The Philippines

I was intrigued by the inclusion of The Philippines, a country where we already complete a fair amount of work – the time zone is great for overnight processing, the education system is good and, we find, people are keen to learn and ready to listen to feedback – important things when you need manage quality from many time zones distant.

Over the last five years or so the dominant direction of business process outsourcing has been to India, with other countries like the Philippines and China lagging behind but still taking a fair chunk of work from US and European professionals.

And the biggest reason was the chance to lower costs, mainly on the back of lower wages in these countries. The wage differential remains substantial but the case for pushing ever more work to these countries looks to be weakening.

A December 2008 report from TowerGroup points out that managers at some US companies are discovering that offshoring in India is not the cost-saver they imagined, especially for captive offshore operations, in which the US parent sets up and runs the outsourcing operation, usually employing local workers to staff much of the operation.

Reading this reminded me of a February 11, 2008 article in the Wall Street Journal –
Rethinking the India Back Office; Some Western Firms Weigh Selling Their Units as Costs Rise, Dollar Weakens. The author, Jackie Range, cited a study by McKinsey & Co. and Nasscom, the Indian tech and outsourcing industry group, which found that, on average, company back offices – “captives” – were less efficient than companies run by outsourcing firms that specialize in the business. For some types of back-office work, captives’ costs are 30% higher. The survey also found that the higher costs didn’t lead to lower staff turnover or better-quality work.

More recently, the September issue of McKinsey Quarterly had an article – Time to rethink offshoring? – that showed how shifting cost curves mean the US is becoming a more competitive place to manufacture high-tech products.

“The production of high-tech goods has moved steadily from the United States to Asia over the last decade. The reasons are familiar: lower wages, a stable global economy, and rapidly growing local markets. These factors combined to make nations such as China and Malaysia favored manufacturing locations. In the last two years, however, the favorable economic winds that carried offshoring forward have turned turbulent. The new conditions are undermining some of the factors that made manufacturers of every stripe, including those in high tech, move production offshore” – Ajay Goel, Nazgol Moussavi, and Vats N. Srivatsan, McKinsey Quarterly, Sept 2008

McKinsey’s argument rests mainly on higher wage inflation in offshore locations and transportation costs and here is their summary analysis:

Manufacturing high-tech products is obviously different from knowledge services, but it all goes to show that this change is affecting business across a number of fronts.

Also, since McKinsey complete its analysis the dollar has strengthened, especially against the Indian Rupee, and oil prices have collapsed, so their findings wouldn’t be as compelling today. But these are likely short-term affects that won’t affect the longer-term view.

All up, clients will start to be more discerning when it comes to outsourcing and offshoring. One to watch.