It would be an understatement to say we live in challenging times and no doubt the next 18 months will continue to be difficult. It is at such times that innovation thrives, whether this is through new products and services or new business models or tweaks to old models. It is likely that outsourcing and in particular offshoring will see continued growth, both in terms of the types of activities being outsourced and the companies contemplating such business practice.

The general consensus appears to be that the outsourcing industry will benefit from the looming recession. However, the industry must improve its success rate, if it is to convince the wider population that outsourcing and offshoring are sufficiently mature to be considered a viable business strategy. The fear is that with the current economic climate, the focus will be brought back to simply cost cutting, without the necessary strategic focus being given to the wider opportunities presented by an outsourcing programme.

For companies to reap the significant benefits that outsourcing and offshoring can provide there needs to be considerable focus on:

• Defining what and why activities should be outsourced
• Better and smarter SLAs and measurement systems
• Selective use of specialist advisors
• Flexible contracts
• Management of relationships (communication and culture)
• Going beyond just labour arbitrage
• Ensuring multi-disciplinary teams to manage the programme
• For suppliers, either have scale, deep knowledge or both ”” competing on the strength and depth of their talent pool, knowledge, technology enabled infrastructure and client relationships

Why outsource?

The activity that distracts someone from their core business is the core business of an outsourcing service provider ”” that means treating it as a profit centre, not a cost centre.

For the last decade it has become apparent that future organisations will be different. If most large organisations were to start anew, most wouldn’t build the organisational model they have now. Outsourcing gives companies a framework to re-engineer themselves using a model that is in tune with today’s technology enabled and converged environment.

Outsourcing functions

Information Technology Outsourcing (ITO) was the original and still marginally leads in terms of outsourcing market size.

Business Process Outsourcing (BPO) has emerged as an effective sourcing strategy for organisations seeking to reduce their operating cost base while also improving service delivery and support for their customers, suppliers and employees.

Knowledge Process Outsourcing (KPO) is the new wave. It is different from BPO in terms of the value proposition to the client, which leads to a clear demarcation in process complexity, the amount of intellectual intervention in the process, the skills required and the ability to scale.

Types of outsourcing models

Onshoring ”” outsourcing in the same country ”” offers modest cost benefits through employment of staff from less economically developed regions and the removal of industry specific benefits.

Insourcing ”” where a function is performed without the involvement of a third party (similar to shared services). This term is also sometimes used to describe bringing previously outsourced processes back in-house.

Nearshoring ”” the transfer of business functions to a different country but one that is either adjacent or relatively close to the organisation’s home country.

Offshoring ”” The process of working with an offshore partner for service delivery, usually where the partner is a third party, but this term also applies to offshore services delivered from within the same company (a captive unit). It does not automatically mean outsourcing.

Rightshoring / Multisourcing ”” outsourcing to a combination of onshore, nearshore and offshore destinations, having identified the best location and service provider for each service.

Shared service ”” Consolidation of a service provision point by one part of an organisation or group where that service had previously been found (and provided) in more than one part of the organisation or group. Bringing together of similar services between one or more organisations (that are normally non-competitors in the same area).

Offshoring destinations

Whilst offshore outsourcing is currently just a small part of the overall outsourcing industry, it is dramatically changing business economics through its significant impact on costs, quality and the availability of huge talent pools.

Offshoring is a widely understood concept, at least within the sourcing community ”” what is not so well understood are the top destinations for offshoring.

Mention offshoring and almost all (British business), will mention India, but should organisations wishing to offshore, only think about India?

There is no question, India was the first destination, which viewed outsourcing as a sector in its own right. India still leads when it comes to sheer volume, however many question whether the country is suffering from its own success.

There are new destinations coming up, which may offer a better “deal” for offshorers. These new destinations may also be superior in offering services where India has been weak.

We have also seen the large Indian service providers adopt a global opertaing model, adapting to the needs of client organisations which seek multishoring, but not necassarily multisourcing. Many of these heavyweights have setup shop in Northen Ireland providing onshore and nearshore services to its client base.

Types of firms outsourcing

Clearly in a battle when facing a corporation with significant resources at its disposal ”” an SME with somewhat limited resources (human, technical, legal, financial and global reach) may find the battle somewhat difficult and short lived.

However, the time has now come, when (operationally at least) the many David’s of the world can compete with the few Goliaths that have dominated the markets till now. With the increasing availability of outsourcing and offshoring to the SME market, times are changing.

Outsourcing is nothing new ”” probably as old as the David and Goliath story. Most large corporate organisations within the UK and wider Europe, have embraced outsourcing in one form or another.

Mid-market companies must embrace outsourcing and offshoring now as both a means of survival and as a means to level the playing field with their larger competitors ”” who in most cases already benefit from outsourcing and offshoring.

Although the benefits and drivers for outsourcing are pretty clear, operational execution and risk mitigation strategies are more difficult for the Mid-market to comprehend.

Market size

IT service outsourcing spend in 2007 was the largest and fastest growing category of IT services, at over US$ 183bn (nearly 37% of the total IT services spend) ”” a growth of over 7% from the previous year. The total ITO offshore market was estimated to be worth around US$ 37bn.

Worldwide BPO spend was approximately US$ 462bn in 2007, a growth of nearly 10% over the previous year. Key segments include logistics and procurement at US$ 224bn, sales and marketing at US$ 167bn, with others such as customer management, F&A and HR following behind with US$ 30bn, US$ 19bn and US$ 16bn respectively. All apart from sales and marketing saw double digit growth rates in 2007.

Growing at more than 35% over the past three years, BPO is the fastest segment of the overall offshore market, and is currently estimated to be worth around US$ 28bn.

Consolidation / global reach

The outsourcing services provider market has witnessed significant changes in the past few years. In addition to establishing captive BPO centres, customers now have a substantial choice of third party vendors to engage from different regions. Several hybrid sourcing models like BoT (Build, Operate, Transfer) and virtual captives are also being used. The market has witnessed increased M&A activity as providers are looking to build scale and acquire new capabilities rapidly; particularly to increase geographic reach and acquire service segment capabilities.

Many Indian companies are creating global reach and attempting to cater for those European clients which desire onshore of nearshore presence by opening up offices in Northern Ireland.

For instance, First Source has created around 1,000 jobs. HCL has 2000 employees at its contact centres. Polaris, an Indian software development company is creating 158 jobs in Belfast over the next three years. The most recent investment is by Tech Mahindra which has set up a centre of excellence for the design and implementation of business solutions in Belfast.

The dominant outsourcing activities

Six activities dominate the offshoring space: (1) software, web development, testing and management, (2) IT support, (3) email customer support, (4) documentation and knowledge management, (5) call centres and (6) invoicing, bookkeeping and accounting ”” all activities which are discrete and technology enabled.

Activities most likely to be outsourced onshore include HR recruitment and training, facilities management, logistics and media management ”” all either requiring physical contact or in depth local knowledge.

Op2i is a business improvement firm specialising in outsourcing, providing and combining advisory and implementation services throughout the sourcing lifecycle.

Email Bharat.Vagadia@Op2i.com or Ross.Caldwell@Op2i.com.

This article is excerpted from the Outsourcing Survey Report 2008 produced by Op2i in association with Invest Northern Ireland, International Outsourcing Forum, KenCall, Sourcingfocus.com, Buffalo Communications and SPW Accountants. The full report is available on request fromOp2i at www.op2i.com/accessreport.php.