Offshoring – Understanding the Changing Landscape

Changes in the world economy are rippling through business andgovernment. From so-called bailouts to new regulatory oversight,offshoring is attracting even more attention as a viable businessstrategy. But how is the changing economy affecting decisions tooffshore?

According to a quote in the U.S. Conference Board’s 2009 Report: Assessing Offshoring Risks, Raman Roy, CEO of Quatrro and widely referred to as India’s “father of BPO” It’simpossible to get a reliable view if the industry and trends are from asingle source. The press, industry associations, others are unreliable.You have to piece together views from various people.” So here are some of  my thoughts on the changing landscape.

New trends in offshoring areemerging, due in part to economic conditions, government influence andchanging values. An interesting phrase I heard at a recent CORE (Centrefor Outsourcing Research and Education) conference  was introduced by Jeffrey Garten, a professor at Yale School of Management.Garten described government involvement in business as a migration from“free capitalism” to “state capitalism”. So what does this mean forcompanies pursuing an offshoring business strategy both as buyers andsellers?

Outsourcing is one of the few growth businesses thatexists in the current economy. The cost benefits (5 - 40% ) fromoffshoring are well known and expected, so offshoring goals haveevolved into sophisticated expectations of value that extend wellbeyond labour arbitrage.   

Business Leaders’ Offshoring Goals                              2004   2005    2006
Labor cost savings       72%    76%     91%
Other cost savings                                                              72%    76%     72%
Access to qualified personnel                                          42%     54%    68%
Growth strategy                                                                      –      59%     67%
Competitive pressures                                                        54%    55%     58%
Improving service levels                                                     42%   36%     54%
Business process redesign                                                 27%    36%    53%
Increasing speed to market                                                27%    28%    46%
Adopting an industry practice                                           28%    39%    35%
Enhancing system redundancy                                          21%    26%    22%
Access to new markets                                                        17%    17%     15%
Source: 2009 U.S. Conference Board “Assessing Outsourcing Risks”
Duke University/Archstone Consulting Offshoring Research Network U.S. Surveys (2004 and 2005)
Duke University / Booz Allen Hamilton Offshoring Research Network 2006 U.S. Survey (2006).

So why aren’t more companies offshoring? From many conversationswith senior leaders, discussions and reading it seems to come down to ashort list of concerns:

1. Reputation Risk – there is a fear that joblosses in North America could lead to community or union activismlinked to their decision to offshore

2. Government Influence – whether explicitor implict, the implications of ”state capitalism” imply direct orindirect government actions such as protectionist tax treatment. Thisof particular concern in the U.S.

3. Capacity – if the company is fighting forsurvival, there may not be sufficient bandwidth to invest in newstrategies that produce future benefits. The timelines can be long, andthe benefits are realized after transition is completed.

Despite the obstacles, distractions and concerns, Advisors andAnalysts continue to forecast tremendous growth in offshoring in thenext few years. Cost pressures won’t go away, and strategicbenefits are always important. 

According to Andy Jones, Alsbridge Consulting (outsourcing Advisors) “Thelast decade has been a time of great success and profits for banks,meaning they have not had to focus on their cost base. However this isgoing to change. Over the next 12 to 24 months FS organisations willhave conflicting pressures. There will no doubt be more regulatorychanges (as a result of recent events) to implement but at the sametime they will have to also address cost pressures too.”,3800010322,39394803,00.htm.

Banks and insurance companies, worldwide, are and will continue tobe the biggest buyers of offshoring services. Governments, health careand education haven’t really ventured in this direction yet, Even ifthey had serious intent, it will take years to catch up.

Linda Tuck Chapman, Ontala Performance Solutions Ltd. can be reached at [email protected];

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