Like all business sectors, offshoring and outsourcing has plummeted due to the deep global recession. But although deals are smaller in scope, spend and size, the industry continues to grow. In fact, organisations that have struggled to ‘keep the lights on’ are currently planning on a recovery that includes extensive expansions into both offshore and onshore outsourcing by the year’s end.
That’s the conclusion of Doug Brown, a partner at the Brown-Wilson Group, a Datamonitor company based in Clearwater, Florida. He predicts, along with co-author and business partner Scott Wilson in their book, The Black Book of Outsourcing, that the industry will rise more than $1400bn in the next 10 years, generated from current users plus the untapped vertical and global geographic markets.
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More immediately, they predict an outsourcing resurgence by the end of this year.
They base their predictions on analysis by US and UK businesses, which has found that offshore suppliers can be reliably measured by cost savings delivered, service levels and downtime, and suitability with their organisations based on customer reference checks.
“Cost savings still drive a company’s decision to offshore, in addition to the availability of skilled and educated workforces,” says Mr Brown. “But more US and UK buyers of outsourcing are moving into a new phase where they are finding more balance between what can be kept in house, what is best outsourced to a same-shore vendor, and what can be sent offshore.”
Therefore, companies will continue to offshore non-human contact activities. “Jobs that require voice contact with a local are returning, including technology support and customer services,” he says.
Executives at EquaTerra, a global firm that provides advisory services in IT and business process transformation, agree.
“Today’s economic climate is causing companies to look for more certainty in cost savings from their improvement initiatives,” reports Bob Cecil, EquaTerra’s executive director of Business Process Advisory Services.
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Same reasoning
Despite the downtrodden worldwide economy, the Satyam scandal that endangered the Indian outsourcing industry with precipitous losses, and the November 2008 terrorist attacks in Mumbai, companies have not fundamentally changed their reasons for outsourcing and offshoring. In fact, certain advantages, such as cost savings and creating a variable cost structure, have taken on increased importance.
“Many companies that had not outsourced were caught off guard with a heavily fixed cost structure when the market quickly turned down,” says Mr Cecil. “Equally, many companies are having a difficult time predicting the speed of market recovery.”
Mr Cecil sees two categories of companies that are most likely to outsource and offshore functions: those that have historically resisted outsourcing and offshoring -- or always had higher priorities, and those with significant offshore outsourcing experience.
“The neophytes are being forced off the sidelines,” he says.
Companies with experience continue to outsource and go offshore because they are seeking competitive advantage.
“They are carefully reviewing their portfolio of outsourcing relationships, culling poor performing relationships, and adding additional scope to their strong relationships,” says Mr Cecil.
Technological impact
Technology plays a huge role in facilitating offshoring/outsourcing and brings new opportunities that did not exist a year ago. This includes infrastructure changes, such as communication networks and system transformations that update both client and vendor capabilities.
“Service locations around the world, particularly in Latin America, are capitalising on these technology advances to attract US clients,” says Mr Brown.
Today nearly all major providers have enabling technology that ‘bolt on’ to a company’s enterprise resource planning (ERP) system to allow remote and more standardised processing of work.
“We are seeing service providers increasingly offering full ERP ‘platform’ solutions geared toward either specific industry verticals or the middle market,” says Mr Cecil. “We are also seeing increasing emphasis on comprehensive governance tools to manage outsourcing relationships.”
Location, location
Geopolitical risks threaten the stable delivery of outsourced services. In fact, experts contend that after the terrorist events in Mumbai, the risk/reward calculations in making outsourcing/offshoring decisions have been irreversibly changed.
“Client organisations need to realise that outsourcing does not decrease risk unless there is proper oversight including the business-crippling hazards that are lurking among offshore delivery locations,” says Mr Brown.
He maintains that investors and prospective clients are no longer motivated by destination advertising alone.
“Not that long ago, English language speaking skills and high numbers of unemployed locals turned into the often misguided recommendations of where to consider offshoring,” he says. “Recent endorsements of South Africa, Nigeria, Pakistan, Kenya and Jamaica proved unreliable and the next year’s list changed again.”
That said, India still remains the primary location for services.
“The Indian government, along with Indian-based service providers, has been actively working to add transparency into providers’ financial conditions,” says Mr Cecil.
In addition, almost every major provider with Indian operations has broadened their geographic service delivery footprints. Countries such as the Philippines, Argentina and Guatemala have all become more important locations for service provision.
Realistic expectations
While there are inherent risks, such as loss of intellectual property, breach of data privacy, or business discontinuity due to large-scale operational failure, Mr Cecil maintains that these rarely occur.
“The smaller risks tend to give rise to the greatest issues over time and erode a relationship,” he says. “These include not setting expectations for improvement and the investments required to achieve improvements appropriately from the beginning.”
IN FOCUS
PRACTICAL TIPS FOR OUTSOURCING
- Understand where your outsourcing is going.
- Know where your outsourcing data is being backed up.
- Do not rely on consultants to entirely drive your process to avoid bias for particular vendors.
- Do not overlook mid-tier vendors as the economy improves. Mid-tier firms have proven their ability to best partner initiatives, customise and remain flexible to their clients, either on a project or system basis.
- Evaluate the location of the vendor’s headquarters, cultural understanding and match to your executive team and strategic direction through the recession.