Outsourcing in an era of globalisation, convergence,
competition and economic slowdown - An Op2i perspective
and interim survey findings

Given the current economic environment, there are mixed feelings about whether
more organisations will embrace outsourcing and whether the traditional rationale
and business models for outsourcing are changing.

In a world where we have continuing overcapacity, increasing globalisation, the commoditisation of some services, the emergence of new technologies and what appears to be a prolonged depressing economic outlook, one thing is clear: organisations large and small face an era of exceptional competition – this trend
is likely to continue for some time, beyond the current economic cycle.

The implications for the outsourcing industry are less clear – it is likely that
Europe will see some curbs on offshoring, given increasingly protectionist
policies and trade union pressure, as unemployment rates rises.

Hence two quite contrary forces at play – one which requires organisations to become more efficient (in all its economic forms) and global and the other which
is forcing organisations to think local and protect jobs, at higher costs and
reduced efficiency.

In many senses both the above are within the same economic equation, but requires an added dimension – that of time. The era of convergence and competition are long-term trends that will only get more intense with time,
whereas the protectionist trends are short-term, a reaction to the current
economic slowdown.

Given the focus on short term bottom line for all organisations, it remains a
major challenge for the outsourcing industry to persuade end users to incur the substantial initial cost involved in any new outsourcing contract.

Given that a substantial number of outsourcing deals fail in one form or another,
for one reason or another, for outsourcing and offshoring to penetrate deeper into organisations large and small, new and innovative business models will be required, with much more risk sharing between clients and vendors – the emergence of Outsourcing 2.0 so to speak.

Interim Survey Findings

Op2i launched in October 2008, a survey to understand the state of the
outsourcing market, given the current economic downturn and perceived view
that there was a fundamental shift from Outsourcing 1.0 to Outsourcing 2.0.

The survey had already gathered views from industry gurus and participants are provided an instantaneous comparison of their answers to those of the gurus
upon completion of the survey.

The survey information below includes views from outsourcing users, suppliers and experienced advisors. This analysis below is based on respondents from across the globe, including the UK, USA, Europe, India, Australia, Philippines
and the Middle East, as of Friday 7th November 2008.

Op2i will be releasing the final survey findings, in addition to interviews with key industry leaders through a report which it will be launched at the International Outsourcing Forum in 2009.

We encourage all those involved in the outsourcing industry to take part in the survey to provide us, and the industry a robust view of where the outsourcing industry is headed!

The survey and analysis tool is available on www.proxi.co.uk/op2i

Some interim results:

• Just over 50% of the respondents believe the current economic downturn and credit crunch has increased interest in outsourcing. Given the current focus on cost reduction for many companies, this may appear to be a somewhat surprising finding. However, based on our experience, many companies who would be potential outsourcing candidates are delaying their decision making process and therefore interest in outsourcing is on hold. It also clearly depends on the type of outsourcing being considered – any deal that would require large upfront
  investment will clearly find it more difficult than a proposition which reduces costs, without significant capital investment. 
  
  
• Over 80% of respondents believe outsourcing / offshoring benefits domestic businesses, contrary to perceptions within the general media and the rhetoric expounded by some politicians. Less than 5% believe outsourcing / offshoring has a detrimental impact. Most believe the key benefit that outsourcing / offshoring brings, is with respect to productivity and efficiency, whilst cost savings is close behind. This would suggest the industry has
  now matured to a stage where the proposition is not simply one of cost cutting, but about additional value add.
  
  
• The vast majority of respondents believe outsourcing/ offshoring has positive benefit on the domestic economy, with around 60% stating that access to new skills and labour are the principle drivers. This is not unusual, given the aging population of developed economies and specific skills shortages in some high technology areas. Around 25% believe outsourcing / offshoring enables developed economies to compete with emerging economies, whilst around 10% believe it will damage the economy in terms of reliance on other countries and transfer of knowledge.
  
  
• Not surprisingly, a majority, in excess of 60% believe selecting the right processes and functions for outsourcing
  in the first place is the best means of getting maximum return on their outsourcing investment. However, what is surprising is that only around 5% believe a well constructed reintegration plan of processes at the conclusion of the agreement as being important. This would seem to suggest most organisations that outsource, don’t expect
  to bring those processes or functions back in-house, rather, that at the conclusion of the first agreement, either they will renew the agreement, or transition to another supplier – or perhaps many just don’t realise how
  important reintegration is…
  
  
• India still leads by a long way in terms of organisations first choice for an offshoring destination.  The top two drivers are the availability of skilled workforce and India’s existing track record. What is surprising and bodes well for India, given its problems with wage inflation and exchange rates, is that less than 20% choose India due to lower labour costs.
  
  
• The Philippines comes joint second with China, but for very different reasons. Most organisations choose Philippines for its language capability and would concur with a recent trend of call centre outsourcing heading towards the Philippines. Many respondents also view the Philippines stable economy as being one of the drivers.
  
  
• China competes with the Philippines for second choice, but primarily driven by the search for lower labour costs, where of 70% of respondents rated this as being the most important driver. Access to resources was the only
  other driver for choosing China.
  
  
• Clearly India, Philippines and China all offer quite different value propositions and in many ways compete for different aspects within the outsourcing sphere: India for specialist skills (e.g. ITO and KPO), Philippines for customer facing language skill sets (e.g. Customer centric BPO), China for general back office, lower skilled
  BPO and those not needing significant English language interaction.
  
• The findings challenge talk of India or Philippines losing their edge in offshore outsourcing to China anytime soon...