Outsourcing drivers in today's climate: large companies want to globalize, mid-sized companies seek expertise

By Phil Fersht

We wanted to share some recent dynamics from our new survey of outsourcing adoption intentions in mid-2009.

While the onus on firms today is to drive out as much cost as they can from their businesses (close to four-fifths view cost-reduction as the primary driver for outsourcing), other factors are becoming crucial for companies’ planning as they evaluating outsourcing business models, notably globalizing their businesses more effectively, re-engineering business processes, and accessing expertise from service partners.

If there's one thing this recession taught us, it is how integrated global economies and markets are today, how businesses need to adapt to move in and out of diverse regional markets, and how they must make rapid decisions to invest or divest global service / product lines in order to prosper. While some firms are find it hard to make radical decisions in this downturn, others are clearly addressing how critical it is to operate as a global business, and this is especially the case with large enterprises ($3bn+ annual revenues), with 60% of enterprises viewing this as a very important factor in their outsourcing decision making:

Key drivers behind outsourcing uptake in today’s economy

 

In addition to globalizing their businesses, over half of the large enterprises (54%) are considering outsourcing as a vehicle for re-engineering their business processes. Many firms have used the recession as an opportunity to focus heavily on eliminating wastage and streamlining poor process flows, for example using Six Sigma methodology, which has effectively put them in a much healthier position to move into outsourcing environments that can be underpinned by robust ERP and standardized processes. Outsourcing can provide a valuable change-agent for enterprises to drive these fundamental transformative measures through to fruition.

Many firms in pre-recessionary times have not been so diligent, opting for "lift and shift" outsourcing engagements whereby they transfer job functions from onshore staff to lower-cost offshore labor, with limited upfront process re-engineering. Inefficiencies are magnified several times over in an outsourced model, and customers must focus on a 72 month program of transforming process, investing in new technology platforms, and not a short-term 24 month “cost take-out” exercise, where they leverage a service provider to take on their back-office baggage and grant them cost-savings.

While large enterprises are clearly focused on improving their processes during outsourcing, only a third of mid-sized companies ($750m - $3bn annual revenues) view process transformation as a very important factor, while 45% cite their need to access new skills as very important. For example, many of our mid-sized clients are seeking to move into broader managed service agreements to gain better (and more cost-effective) access to application development skills, where they can develop long-term relationships with service provider talent than can work onsite with existing staff, in addition to providing low-cost support from offshore locations.

So what can we expect next for the Outsourcing Industry?

As the fog slowly lifts from the recession, companies are focusing more than ever on cost-containment, and outsourcing clearly is a vehicle for driving out expense from the bottom line.

However, it needs to be combined with ongoing business transformation initiatives, and too many companies in the past have tried to exploit outsourcing to take out too much cost too quickly and been made to pay the penalty. Our data clearly indicates outsourcing will be (and already is) coming back with double-digit growth over the next few months, however, we do not expect to see as many mega-deals as yesteryear. They will be largely cautious, smaller-scope engagements, focused on lower up-front capital expenditure, supported by low-cost offshore and nearshore resources. The advent of SaaS/BPO promises to help deliver these principles, but we’re only at the beginning of the new wave of Opex-based outsourcing delivery.

Comments

[Alan Smith]

Very interesting datapoints Phil.

We are seeing companies that have never outsourced before serious about taking the plunge. The last few months have been a period of "watching and waiting" as companies evaluate how the economy will evolve, but now it appears we have avoided armageddon, and this data reflects we can expect to see an uptick in activity over the second half of this year and beyond.

[Larry Levy]

Phil - concise insight as always, thanks for sharing. While this data reflects the likely behavior over the next year or so, my concern is more focused on the social impacts of offshore outsourcing in this economy with all the mass layoffs etc.

Do you see a political backlash that will impede this adoption in the future that is greater than the mild protectism we see currently?

Larry Levy

[Phil Fersht]

Larry -

While many people stipulate they will retain as many jobs onshore as possible, when it comes to companies' bottom-lines, it isn;t top priority for them. You can read more on this issue here:

http://fersht.typepad.com/the_outsourcing_bloghorse/2009/04/why-protectionism-is-failing.html

PF

[John Collins]

Just wondering is there any geographic distinctivness apparent within your numbers? I would say, at this stage, the 'mature' view of Outsourcing in North America is quite different from the fragmented and inconsistent experience across Europe - anything to show that is changing?

[Phil Fersht]

John,

These are all US firms... the dynamic in Europe varies per country, with the UK being aggressive towards all types of outsourcing and the French and Germans very tentative (but beginning to move out some transactional and low-end work in small contracts),

PF