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A new outsourcing reality

by Paul Johnson, Head of Development, First Clarity

In mid-April the TPI Global Quarterly Index for Q1 2012, which provides a snapshot of the sourcing industry, showed that the value of overseas outsourcing contracts fell compared to both this time last year and compared to the previous quarter. Looking at different disciplines, IT outsourcing contact values showed a decline of 30% on the same period of the previous year. Other research, for example from the Hackett Group, as well as narrative evidence backs up the TPI findings.

It seems that the offshoring boom of the past three years is over and we are facing a new outsourcing reality. Recession and related fears created that spike in demand. Now, I believe, ongoing economic uncertainty and a return to recession in the UK, coupled with some of the consequences of offshoring are leading to a new turn in the market.

A considerable proportion of the off-shoring of recent years was to cut costs. With many functions like IT services and development already stripped out, in many companies there is little left to offshore. Budgets remain tight, hence there is nothing new to outsource. At the same time, for some companies, the honeymoon period with their off-shore partner might be over and 1 or 2 year contracts may not be renewed.

As outsourcing costs have continued to rise in countries that experienced little or no recession, costs in the UK have fallen helping to make on-shoring much more competitive. The National Outsourcing Association echoes this view. In a recent article its chairman, Martyn Hart, explains the issue very succinctly:  “nowadays, with rising inflation in popular offshore destinations like India and China, the cost of doing business abroad has skyrocketed. Not only that: the costs of supplier management are escalating too.”

Organisations’ understanding and use of outsourcing is maturing and price is no longer the biggest driver. Changing requirements are pushing organisations towards different sourcing models. For example in the field of software development, companies are increasingly outsourcing to take advantage of skills they do not have, and to learn new skills. This means they are looking for outsource partners that are also expert consultants. Unfortunately, many traditional software development companies are unable to offer this. In addition, there is a growing trend in software development towards much closer integration of teams, between the IT specialist and the business which seems to point away from long-distance outsourcing.

Further, the UK economy is not recovering as rapidly as many expected. This is resulting in both social and political pressure to keep jobs on-shore: off-shoring is an easy target for finger-pointing. Additionally, public perception of offshoring hasn’t changed much, despite improvements in service.  Companies are not immune to these pressures and those that choose to do their development/ manufacturing/ customer service etc., onshore are able to turn this into a notable selling-point.

So how can companies use these changes in the outsourcing market to their advantage? The obvious place to start is a re-visit to your sourcing strategy. Is it delivering the objectives you want it to? Have your objectives or drivers changed?  It is also worth reviewing the off-shore/ near-shore/on-shore options available to ensure you are still making the best decision. 
If, as I believe, on-shore is in the ascendancy then is certainly is worth exploiting its strengths. While some functions like business process outsourcing are less time and distance-reliant, others like agile or scrum-based software development are proven to work much better when done on location.

As previously noted, closer integration of teams on both sides of sourcing is gaining in popularity. With shifting costs and evolving priorities, if you reconsider whether the work that you outsource, as well as the employees in charge of it, would benefit from being done geographically closer to your company, your organisation may find that the cost-benefit balance has shifted slightly.

The UK is particularly good at highly-skilled activities like specific software development or electronics.  What’s more, its professionals hold a lot of specific industry knowledge which is unobtainable anywhere else.  You are also able to find mid-tier companies that provide a mix of consultancy and ‘doing’ at a very reasonable price.

Additionally the UK remains a paragon of upholding intellectual property law and is still a top 10 destination in the Brown-Wilson rankings of secure outsourcing destinations. For high-skill areas of outsourcing, this respect for IP is important, as many organisations that have had to fight intellectual property cases in courts abroad will tell you.

For a whole range of reasons the overseas outsourcing industry is changing and, I believe, becoming less attractive. For many companies this should signal a re-assessment of their sourcing strategy.  The question is can businesses turn the changes to their advantage, and what does that mean for UK onshore outsourcers.

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