November 2015 Issue
Since its introduction as a corporate strategy, outsourcing has been a divisive subject. For those companies engaged in outsourcing, the benefits are plentiful. It allows firms to increase efficiency, cut costs, speed up product development and focus on their core functions. It also provides organisations with access to a dedicated and specialised workforce and saves expensive infrastructure and technology costs. Outsourcing allows companies and even governments to hand over a number of functions and business processes to a dedicated third party. While the majority of outsourcing is limited to functions such as IT, recruitment and technical support, the process can be extended to a variety of departments and functions.
Over the course of the last 50 years or so, outsourcing has become one of the key trends in the business world. The pace of outsourcing shows little sign of slowing. Global outsourcing in the first half of 2015 broke a number of records. According to data from the Information Services Group (ISG), though global annual contract value in the first half of the year dropped 7 percent to $6.2bn, a record 451 outsourcing contracts valued at $5m or more were signed in the second quarter, taking the number of contracts agreed in H1 to 754.
“Much of the recent spate of outsourcing agreements can be attributed to the shifting sands of technological development.”
Much of the recent spate of outsourcing agreements can be attributed to the shifting sands of technological development. Many organisations are concluding a higher number of agreements at a lower value, as they avoid being locked into cumbersome, long term contracts at a time when new technologies and operating models are causing significant disruption in the ITO and BPO markets. “The market continues to push into new territory with record volumes of global outsourcing adoption,” says ISG president and partner John Keppel.” “In fact, three of the past four halves have logged the highest counts ever. We’re seeing a clear and continuing trend toward more deals at lower value. From the start of the recession in 2008 until now, counts have nearly doubled, while actual cash value has risen only modestly. Technology has changed significantly during this period, which saw the beginning of the Digital As-a-Service revolution and its continuing pervasive impact on the global services market.”
Given the recent volatility and price crash in the oil & gas industry, we could see a surge in outsourcing from firms in that field. Many companies in the oil & gas space are facing increasing budgetary pressures given the current state of the market. Some analysts have suggested these companies may slash their budgets by 10 to 25 percent in the years to come. In North America, independent producers may look to reduce their budgets by as much as 30 percent. With mounting pressure to reduce costs it is likely that organisations will turn to outsourcing and other optimisation strategies to maximise profits and create realistic, sustainable savings. Presently, only 36 percent of oil & gas firms in the Forbes Global 2000 utilise outsourcing as a cost saving measure. This number is likely to grow substantially in the future.
Although there has been a notable uptick in outsourcing agreements, the process has its detractors who suggest that while turning over functions to a third party does offer considerable cost synergies, the standard of the outsourced work often suffers compared to work carried out by in-house teams. Mass outsourcing of work abroad can have a detrimental effect on staff both at home and overseas. Jobs leaving a company for a cheaper third party abroad can be a wrench for in-house staff. In the developing country, the process can provide a short term boost to jobs, wages and living standards, but effectively creates a ‘race to the bottom’ as countries and organisations compete to provide services at a ‘competitive’ rate.
Information security is another factor companies must take into consideration when pursuing outsourcing agreements. Bribery, corruption and cyber security are major issues in the modern corporate landscape. With the Edward Snowden scandal still fresh in the memory, government outsourcing contracts remain a contentious issue. Regardless, government outsourcing continues at pace. Countries such as the US, the UK and Australia lead the way in outsourcing public services. In 2013 alone, the US awarded more than $500bn in outsourcing contracts, covering a wide spectrum.
In certain sectors in the UK, however, opinions on outsourcing are less positive. The healthcare sector, for example, has dramatically reduced its reliance on outsourcing practices. In the two years up to 2014, outsourcing was wildly popular in healthcare, but that seems to be changing. According to data from management consultants Bain, the UK advertised £5.8bn worth of NHS work to the private sector, a surprisingly flat total in comparison with the previous two years. The introduction of the Health and Social Care Act in 2012 led to greater private sector involvement in the healthcare space. This involvement has been checked by financial difficulties and sub-par performance by many of the private firms entering the industry.
Despite the fears and criticisms, outsourcing is here to stay. The benefits that the process offers to organisations can outstrip the negatives – as long as the risks are properly managed and agreements are carefully negotiated and drafted. In the global economy, outsourcing is now part of the fabric of daily business life.
© Financier Worldwide
BY
Richard Summerfield