Is the economy impacting your outsourcing relationship?

While there are opportunities in outsourcing and offshoring to businesses under pressure to cut costs and stretch slimmed-down budgets, that opportunity is accompanied by an additional level of complexity, said a PricewaterhouseCoopers LLP executive.

In the IT world, especially, outsourcing and offshoring models have become extremely mature with time, said Madhav Murti, a vice-president specializing in offshoring and outsourcing advisory services with the Toronto-based professional services firm. But in tough economic times, he said, new complexities like service provider viability must be considered when implementing these models because “now the level of risk has gone up so much.”

“What is happening is, any company looking at an outsourcing relationship is dealing with a provider environment which is extremely volatile,” said Murti, listing diminished business, access to credit, and stock market pressures as factors brought on by the weak economy.

Given those various impacts, businesses considering a new outsourcing relationship should first evaluate the service provider, said Murti, given “the diligence of the service provider goes up probably fivefold because you can no longer just look at their financial viability.”

But on the positive side, there is an opportunity for companies who have previously only dabbled in outsourcing pilot projects to expand the scale and scope of the work, said Murti. “It’s becoming a buyer’s market again because service providers are hungry for business…so your ability to get their attention…is high.”

Murti said new locations for outsourcing and offshoring are presenting themselves as currency volatility has weakened traditional destinations like India and Mexico. Depending on the scale and scope of work, he said, businesses may be able to start discussions about outsourcing to more attractive locations like some South American countries.

As for those companies already outsourcing part of their infrastructure, Murti suggested revisiting the relationship to ensure business continuity and that the service provider remains able to meet all the business’ expectations and commercial obligations originally outlined.

Moreover, understanding the service provider’s relationships with other clients is important, said Murti. “This is a new complexity because typically you would not go beyond your own relationship with the service provider,” he said. “But now you need to understand their exposure to other clients and how that may impact how they end up servicing you.”

If a company’s business requirements or strategy has changed, then the scope, scale, terms and focus of the relationship may need altering, he said. And, in the event the service provider arrangements are unable to support changing business focus, and the relationship is to be terminated or renegotiated, Murti said a business should review and understand its contractual obligations and rights.

John Simke, chairman of the board of directors with Toronto-based Centre for Outsourcing Research & Education (CORE), said that while 12-18 months ago businesses in richer countries like Canada and the U.S. may not have welcomed the hassle of outsourcing, they are now certainly considering it as a means to cut costs.

And although it may be a bit early for existing outsourcing contracts to be severely affected, fluctuations in currency, while not a direct impact of the weak economy, has been a notable issue, said Simke. “It’s no question that when the Canadian dollar drops 20, 18 per cent as it did last year, that has changed the economics of a lot of outsourcing contracts,” said Simke. “If you were doing business in India and you were paying in rupees, all of a sudden it’s costing you a lot more because the Canadian dollar has weakened.”

That said, currency fluctuations can benefit either party in an outsourcing relationship, said Simke.

Also, if the unstable market has left a business in a bad state, it may be faced with severe penalties for not meeting the predetermined business volume quota, said Simke. “I can certainly see those volume guarantees could become an issue when business diminishes a lot,” he said, adding that the service provider will at the very least demand some compensation, if not the full penalty, for the infrastructure already put in place.

Simke said that in the interest of uninterrupted service, businesses should also consider the economy’s impact on the social stability of countries to which they outsource or offshore.

But while there is an added level of complexity to outsourcing and offshoring in a tough economy, Murti said those approaches were already quite complex and strategic to begin with. Businesses should avoid knee-jerk reactions to the challenges they’re facing and continue to think strategically, he said. “Companies already talk about strategy and doing the right thing for the long term, but at times like this, they generally tend to freeze and only basic things get done.”

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