Strategic services outsourcing is continuing to prosper despite the speed bump caused by the recent global recession. But structural issues remain. High demand for leaders in the field has pushed up salaries. Turnover for good executives is high and loyalty can often be low. Quality continuity can be a problem.

As we operate in China, India and other parts of Asia where outsourcing operations are located, we use our competencies model to find visionary leaders who are able to create organizational buy-in, customer-orientation and high performance, results-driven cultures.

Good executives are there, but the pipeline for the future is not. Companies will need to develop and integrate local leadership talent more aggressively and adopt global practices for recruitment and retention.

Two key problems with outsourcing are:

Cultural differences. One executive may value teamwork over independent action or vice versa. An executive accustomed to hierarchy may find autonomy unsettling. Our research on leadership in China indicates that the probability that a new employee will remain at a company for more than two years is about 50 percent, but when someone who has been at one company for 10 years takes a new job at a new company the probability of remaining more than two years plummets to 20 percent. And when a team gets a new manager only 20 percent of the team will remain after two years.

Some outsourcing operations may not understand what kind of company culture is likely to attract employees at all levels. For example, American owners accustomed to an aggressive, action-oriented culture can unwittingly try to duplicate that culture in a locale that values humility and obedience

Compensation. Pay for good executives continues to escalate. Some companies are “over-titling” roles and offering high compensation. In India, the annual rate of increase has been around 15 percent. Competition between vendors will only accelerate the trend.

Five steps to success

We recommend five principles to ensure that key leadership talent becomes a competitive advantage for outsource providers:

1) Build a results-oriented, performance culture. Leaders must do three things to drive results: Define strategies and adjust them over time; ensure these strategies are translated into goals and tasks for individuals; and promote alignment and accountability to continue to generate results even under changing conditions. Right behaviors need to be recognized and rewarded appropriately.

2) Manage the talent pool actively. The cornerstone of a successful talent strategy is having a clear picture of the kind of talent required. Leaders can identify the capabilities that are most important for success (such as intelligence, flexibility, ability and willingness to learn, motivation), as well as skills needed to do jobs immediately (such as English language ability, knowledge of key processes, technical skill). The strongest companies have rigorous screening processes to ensure that they find what they need. Leaders can also make a strategic choice about how to acquire the talent they need – by developing it internally or hiring from other companies – and prepare to invest significantly either way.

3) Rethink classic organizational models. Instead of adapting the talent to the organization, adapt the organization to the talent. Innovative companies combine business units and functions in ways that fully leverage the competencies that those individuals possess. Outsourcing organizations can also address the talent shortage by doing some outsourcing of their own – their non-core or non-market facing functions can be performed in other countries in the region.

4) Innovate the human resources function. We have found that the most successful organizations elevate the human resources function to the highest level. They know that people are the prime source of potential competitive advantage

5) Chairmen and boards need to constantly evaluate the capabilities of the CEO and the leadership team. After more than two decades of globalization, outsourcing providers could be at any of the stages of evolution – international, multinational, transnational – and saddled with leadership that is more appropriate to a different stage. Companies that fail to make those distinctions and hire accordingly can find themselves falling behind.

Above all, senior business leaders should ensure they are accelerating the development of the rising generation of professionals. The success of the outsourced services sector may ultimately lie in the outcome of this generational story.