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What To Make Of The Global Outsourcing Market

Today, we find more disagreement around the near- and mid-term prospects of the global outsourcing industry than ever before. As with the broader economy, it's a virtual toss-up between the bears and the relatively optimistic bulls. While there are certainly viewpoints tainted with optimism (in both directions), the fundamental market drivers are pointing in every direction.

In general, when times get tough, the initial reaction is to clam-up and wait to see how things develop. From Computer Weekly in late 2008, "Financial uncertainty arising from the credit crunch is likely to lead to many outsourcing deals being re-negotiated, reduced in scope or terminated in 2009 - and they may go into dispute, warns international law firm Pinsent Masons. The firm also says that long-term transformation projects may be delayed or terminated, in part because businesses will look to short-term cost cutting rather than to longer-term benefits."

Now that we've ascertained that the world will not be swallowed whole, companies are moving ahead... with caution and with an effort to take advantage of currently weak demand. One of the key trends noted at the 2009 World Outsourcing Summit was that "Global uncertainty as a result of the world economic meltdown led companies to lower their overall spending on IT and create short-term business plans focused on spending rather than long-term investment. Due to this, companies are now seeking shorter outsourcing contracts to be able to properly adjust their volume and service level terms." Additionally, Stan LePeak of Equaterra recently observed that "Market conditions overall are driving more demand for outsourcing but the nature of the demand continues to change. Buyers are increasing pricing pressure on service providers and are also demanding more upfront and clearly define costs savings, smaller deals sizes and a strong focus on cost savings and cost avoidance."

On the more macro level, governments are taking steps to stem the outflow of jobs from western countries. Martin Hart, Chairman of the National Outsourcing Association says that "The high unemployment rate in both the UK and US is putting added pressure on the current governments to take a protectionist stance on offshoring. US President, Barack Obama has been very vocal about keeping jobs in the US and not offshoring to countries like India. It's not just the US, earlier on in the year the French government announced that any car manufacturer that took a share of the £5.5bn bailout plan had to guarantee that the jobs and factories were kept on home soil." As noted in previous articles, these "protectionist" measures shouldn't outweigh the significant costs savings of moving work to lower cost destinations, and they could actually help local outsourcers regain lost market share.

Despite these pressures, the outsourcing industry continues to develop - sometimes in unexpected ways. Plunkett Research notes that "One offshoring trend that has continued to be strong, despite the recession, is the hiring of thousands of high-quality engineers and researchers to work in the offshore offices (particularly in India and China) of major tech firms such as IBM and Microsoft. IBM opened a research lab in India in 1998. Today, IBM's headcount in India has grown to approximately 80,000."

And in general, Anand Ramesh, research director at Everest believes that "Despite a slump in transactions, the outsourcing industry is growing. The amount of transactions are up from Q1 in 2008 and all involved in the market can rest assured that there will be a continued upward trend. Mr Ramesh believes that by Q4 of 2009 the market will be significantly more positive."

So what to make of it all? Outsourcing in your business needs to be considered very much on its own - with a very tempered influence from market trends or opinion. Take current outsourcing case studies and benchmarks with a grain of salt - even the largest companies are reassessing the nature and terms of their outsourcing engagements. Outsourcing decisions will become less a finance-driven initiative as companies eschew scale-driven deals for contracts that provide clear, discrete benefits. More than ever before - the answers to your outsourcing decision lie within your own business, rather than in following (or keeping pace with) perceived market trends.  
 

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