COMMENT
The boom in outsourcing predicted at the start of the economic downturn in 2008 never materialised. So are businesses now turning to outsourcing a help them through the crisis, asks Paul Morrison.
When it comes to the world economy, we live in interesting times. And as businesses grapple with uncertainty, volatility, austerity, the eurozone crisis and markets in recession, what role if any does outsourcing play?
In particular, has it become a more or less important feature of the business landscape, and is it helping or hindering organisations to succeed?
Outsourcing offers two primary benefits for an organisation weathering the economic storm.
First, cost reduction. Whether it's shaving 15 per cent off the costs of hosting a datacentre with a specialist, or 30 per cent for offshoring a back-office process, cost reduction is almost always the strongest motivation for outsourcing.
The dramatic fall in new outsourcing contracts between 2008 and 2010 had nothing to do with a perceived growth in insourcingPhoto: Shutterstock
Properly planned and executed, the vast weight of outsourcing experience is that significant savings can be achieved, and in a time of economic downturn and uncertainty, you would expect these benefits to be highly valued.
Secondly, outsourcing offers flexibility. A well-constructed outsourcing contract can pass the risk of fluctuating business volumes onto a supplier.
So, for example, instead of paying for an HR organisation scaled up to support a rapidly-growing business, your organisation could pay an outsourcer on a transactional basis - for example, per recruit or per training session - thus flexing your demand for services according to the real requirements of the business.
In an age of cloud and on-demand provisioning, the right outsourcing relationship can encapsulate flexibility and responsiveness.
So outsourcing, its supporters claim, should enable organisations to save money and become more responsive to fluctuations in demand, surely ideal outcomes for businesses under duress.
Back in 2008 and the first onset of the economic downturn, many commentators forecast an outsourcing boom like no other.
The boom never materialised. In fact the immediate reaction of most businesses was to shun rather than adopt major new outsourcing activities. There was no great rush to cancel existing contracts - the benefits for almost all have proven too great.
But in the period between 2008 and 2010 the number of new outsourcing contracts was dramatically lower both for IT and business process outsourcing, down some 30 per cent to 40 per cent from peak levels.
Instead, companies focused on optimising their existing contracts, benchmarking prices and renegotiating commercial terms. But for the most part businesses were not turning to outsourcing to solve or salve their credit-crunch problems.
This trend was nothing to do with a perceived shift to insourcing, the taking work back inhouse from outsourcers.
The few significant occurrences of insourcing in recent years, ardently seized on by outsourcing's critics, are invariably the product of poor...
Comments
There are 4 comments. Join the discussion
1. karen challinor
you seem to have missed the other effect of outsourcing or offshoring which you seem to regard as interchangeable, that being the effect it has on the economy
put very simply, offshoring pumps money out of the economy, destroying the market the company wishes to sell to because no one can afford their products, even if they are passing on the savings this out/offshoring brings to their customers, and the company still suffers
even with simple outsourcing within the country this effect can still be felt in the companies geographically local economy as their outsourcing drives up local unemployment
I did a small example on another article about offshoring somewhere, about a market where one side was sunny so rents were higher on the sunny side, have a read of that, that describes the market you and everyone else works in
why does no one understand the knock on effects beyond looking at their own short term balance sheet
there will come a point where there is no more road to kick the can down and you will have to deal with the problem that you have created
2. Paul Morrison
Hi Karen, interesting comment and I agree that there are wider political debates about outsourcing and offshoring.
However this piece is around the urgent decisions that companies are making to stay afloat in a diffcult market, not about the pros and cons of creative destruction in a modern economy. There are for sure potential winners and losers from economic change, and this should be duly understood, considered and mitigated. I will tackle these broader questions in a future article.
But I will say it is far from clear that the cause of growth and prosperity is best served by preventing firms from pursuing efficiency (through outsourcing or other means). Successful, competitive firms tend to grow (and employ more) in the long term, whilst those less able to change tend to become uncompetitive and fail (and bankrupt businesses are not good employers).
Its also important to note that a number of advanced countries like the UK are net exporters of services, and net recipients of income from overseas activities. So despite appearances, offshoring is a much more complex, two-way process than is generally understood. The challenge is to understand this complex picture and work out how best mature economies (and the workforces in these economies) can best compete in a world of global sourcing.
As a final note, I don't regard outsourcing and offshoring as interchangeable. They are distinct ideas, often overlapping, but the article here is writen about outsourcing. [Outsourcing is the subcontracting of work to a third party, not the movement of work overseas (which may be inhouse or outsourced). Offshoring without outsourcing may result in cost reduction benefits, but because the firm will still own the offshore facilitiy, it will not have the flexibility benefits I refer to in this piece].
Thanks
3. Neil
In all of this Outsource, off-shore (which most ends up being), don;t forget the gustomers who have to lump it with hateful unintelligable Customer Service experiences from bangalore from the likes of British Gas, BT, 3, Sky etc.....
Companies like Direct Line, First Direct - get it.
Tax credits for companies to promote on-shoring of jobs, instead of endless money down the toilet on the Olympics.
4. karen challinor
Paul - "this piece is around the urgent decisions that companies are making to stay afloat in a diffcult market, not about the pros and cons of creative destruction in a modern economy"
I take the point, however if the decisions taken have the wider knock on effect of damaging the economy locally or nationally, then while those decisions might be good for the company in the short term, in the long term they are damaging the very market they trade in
they have, to borrow a phrase, "kicked the can down the road" but in doing so they have damaged the road and eventually there will be no more road to kick the can down
when taking these decisions you cannot simply take the short term narrow focus view of looking at only what goes on within the company walls you have to consider the wider effects
personally I believe taking the insular short term view and only considering what is best for the company is a major contributor to the current financial crises we are all suffering