Outsourcing Progress

Date: 29-10-2009 Source: Businessworld

If you thought outsourcing would take a hit from the financial crisis, think again. While certain sectors have seen double digit declines, other end markets are growing. What the final tally for the year might be is unknown, but the results thus far are somewhat counter-intuitive. Outsourcing’s resilience in the face of such financial and political strain – lawmakers across the globe have often required firms to hire or source materials domestically – has implications for globalization. For one, it suggests that globalization as a trend remains in place despite fluctuations. Second, given that many firms plan to expand their outsourcing footprint, one would conclude that the trend should continue. Indeed, that many small and mid-sized companies seek sources of innovation offshore, suggests the trend has considerable strength. Of course, that doesn’t mean there won’t be bumps in the road: the gap in structural costs between US and offshore manufacturing operations has been cut almost in half thanks to rising unemployment, calling into question new uses of outsourcing. Nonetheless, no one has a monopoly on talent or innovation, so firms will continue to look outside of their domestic market for opportunities. – YaleGlobal The financial crisis did not leave a deep dent on offshoring; it has endured the shock and is adapting to the changes The implosion on Wall Street last year was seen by many as signalling the end of globalisation. De-globalisation became a favourite word to describe the worldwide economic contraction. For the first time since 1982, the volume of global trade actually shrank. Not surprisingly, the outsourcing of services, which had grown dramatically in the past decade, was considered most vulnerable to the global downturn. The pronouncement of the death of outsourcing, however, seems to have been premature. But a year on from the implosion of Lehman Brothers, the information technology and BPO sectors seem to have absorbed the shock, consolidated themselves, and are seeking to adapt and reinvent. The trend, born of technological innovation and new business models, has not been reversed. It is simply reconfiguring and adapting to a new business climate. The phenomenal growth of fibre-optic networks and computing has enabled corporations to run their back offices thousands of miles away. Outsourcing business processes, IT maintenance, research, design and auditing has achieved efficiency and savings. The factors that encouraged companies to outsource have not changed, but their financial ability and demand levels have. In fact, their need to tighten spending has provided an added incentive to outsource some work. What has turned negative is the public perception of outsourcing in the developed West. As politically influential and voluble white-collar workers were the most affected by outsourcing of services, corporations have come under pressure to show patriotism in their hiring, and not focus on maximising profit. What could have been ignored as populism has been embraced by politicians and, in some cases, turned into law. For instance, the US stimulus package requires that software needed for medical-services modernisation be produced in the US. The opposing pulls that have shaped the outsourcing business can be seen in the report prepared by TPI Index, a US-based firm that measures outsourcing contracts valued at $25 million or more. Compared with the first half of 2008, which was marked by record outsourcing, the number of outsourcing contracts awarded fell by 11 per cent, and their collective value by 22 per cent during the first six months of 2009. The sharpest drop was in the banking sector, followed by the energy, food and beverage and consumer durable sectors. But outsourcing grew in sectors such as diversified financials, transportation, retailing and telecom. Not only did the number of contracts rise over the 2008 levels, but their valuations rose as well. At the end of the year, the volume of outsourcing business may still be lower, but the sector’s overall resilience serves as a reminder that entwining technology and business processes can still create value for those who are prepared to adapt. A report jointly produced by Duke University and The Conference Board, a global independent business membership and research association, confirms the durability of the business logic that leads to outsourcing operations and offshoring production. A survey by the group showed 60 per cent of companies engaged in offshoring had ‘aggressive’ plans to expand activities. The report also noted that the globalisation of innovation is continuing at an increased rate in the industry. Small and mid-sized companies, especially those unable to find or compete for highly qualified talent domestically, are increasingly sourcing innovation offshore. Offshore resources also allow firms to bring products to market faster. The report concluded that companies that have implemented a corporate-wide offshoring strategy often report better performance than before. Of course, since the global crisis, rising unemployment, a government stimulus package and the growing emphasis on green technology have combined to drive down production costs in the US. This has narrowed the gap with offshore competitors. According to a recent study by Deloitte, the gap in structural costs between US and offshore manufacturing operations had already begun to shrink before the crisis — down from nearly 32 per cent in 2006 to 17.6 per cent in 2008. The narrowing cost differential, and the opprobrium of sending work abroad while unemployment is high at home, may persuade new firms to reconsider their plan to offshore. Eventually, though, economic logic is sure to prevail and prove to be a more enduring reason to continue expanding global trade connections. Nayan Chanda is director of publications at the Yale Center for the Study of Globalisation, and Editor of YaleGlobal Online.

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