Towards a More Balanced Outsourcing Industry
by Jaroslaw Czaja, CEO, Future Processing
Thursday, June 21, 2012
At the beginning of April, Martyn Hart, chairman of the NOA, wrote a blog post for Sourcing Focus about a trend towards onshoring and nearshoring in SME manufacturing companies. I believe this trend is not just confined to manufacturing, which is heavily reliant on the price of raw materials, but is also affecting other areas like IT outsourcing. Anecdotal evidence from consultancies like Cap Gemini, as well as the financial results of companies like Logica, are pointing towards this.
Over the past 30 years or so, offshore outsourcing centres have evolved greatly. Recently several have been grappling with high inflation and strong exchange rates against the pound, which has pushed prices up. Some destinations have been a victim of their own success, unable to keep service levels high as they grow incredibly rapidly. This is particularly true at the moment as we have just been through a massive spike in demand for offshoring. At a recent event I attended in the UK, delegates were complaining about the levels of churn at their outsourcers and how they felt they now had the ‘C’ or even the ‘D’ team working on their business. Unchecked hygiene factors like this can incrementally push companies away.
The TPI Global Quarterly Index is also showing a decline in the large outsourcing contracts that offshore destinations excelled at. I believe this is for a range of factors that have been brewing for a while. Innovation and quality have been hot topics in the outsourcing industry for some time. Yet many of the contracts and service level agreements that companies hold their offshore outsourcers to are not conducive to producing these - in particular innovation. In fact, traditional outsourcing contracts can be quite the opposite. I get the impression that instead of altering the way their agreement is structured, some companies are just starting afresh. Furthermore, nearshoring is no longer new and some organisations simply want to try something different. While they may not move all their outsourcing away from offshoring, they may well put some of it into a new model.
As outsourcing matures, new drivers are vying with price. This too is gently pushing UK businesses away from far-flung destinations and towards Europe. Skills are taking a higher precedence, attracting organisations to the destinations with the highest skill-level for their requirements. The growing popularity of processes like LEAN, just-in-time and Agile mean companies are looking for closer relationships with their partners. For some organisations cultural affinity can play a key part in fostering those all-important inter-team relationships: there are several European sourcing destinations that the UK has close societal ties with. Other organisations may feel that shorter time differences and closer geographical proximity can help foster greater collaboration.
The upshot of trends like these is that nearshore destinations become more attractive and more affordable for UK companies. The UK media, or at least some sections of it, have been hyping up this reduction in demand for offshore, but I think that it is a natural part of the outsourcing growth and evolution cycle. And I certainly don’t think offshoring is dead – far from it. There will always be demand for it and it will always remain the right solution for some outsourcing needs. However, as the industry matures and develops we are seeing more of an even balance in the shape of the industry.