Previously published in Conspectus magazine, November 2005 (www.conspectus.com)
Offshoring is old news. It is now over five years since the offshoring of services first hit the headlines in the UK and US, and decades since the first multinationals made pioneering investments in locations such as India. But although the novelty of offshoring and the accompanying media hype may have receded, the market for offshore services has not been standing still. There are new players, new types of deals, and new types of offshore activity - in short, offshoring is growing up.
Yet, for the most part, corporate understanding of offshoring is incomplete and out of date. Many executives are unaware of the trends that are shaping the maturing offshore marketplace and, as a result, are unaware of the risks and opportunities presented by global sourcing. This article aims to pick out the five most important trends shaping the offshoring market and clarify their implications for decision makers. It also aims to show that offshoring is no longer a minority pursuit, but should now be a mainstream consideration for almost all businesses.
1. Broadening scope
The most obvious change to the offshoring landscape of recent years has been the increasing range of activities being carried out remotely. Early global sourcing has been dominated by IT development and maintenance, data processing and call centre activities. However, the fastest growing offshoring sector relates to business process outsourcing (BPO), covering functions such as Finance and Accounting and HR, opening up massive areas of SG&A spending that have previously remained onshore. Over the next 5 years, Alsbridge expects most offshore growth to be focused in BPO.
In addition, offshoring is 'moving up the value chain' into more creative and analytical roles, such as R&D and market research. For many years, it was widely thought that offshoreable tasks had to be simple, transactional and repetitive, and not require creative thought. Yet many firms have disproved this assumption, linking sophisticated analytical work into their supply chains. For example, Reuters and McKinsey both have offshore facilities of several hundred staff - working on areas such as financial analysis, research and report writing. In R&D, the likes of Boeing, Pfizer and Siemens are making major investments in offshore research.
This is not to say that all business activities are becoming offshoreable. Most business will continue to require direct, face-to-face contact. A recent survey by McKinsey estimated that only 30% of business services could ever be offshored, and by most estimates even for IT work well under 10% is currently globally sourced.
2. New offshore sectors
Two sectors have dominated the global sourcing marketplace so far - Finance and Technology - driven primarily by their intense usage of offshoreable IT and data processing activities. As a result, the first multinationals to set up offshore centres in India were names such as Texas Instruments, Microsoft, GE Capital, American Express and HSBC.
With the broadening range of offshoreable processes, other sectors such as retail, pharmaceuticals and legal services are increasingly venturing into global sourcing, both in-house ('captive') centres and via outsourcing contracts. In addition, with broad ranging government efficiency drives both in Europe and America, the public sector is also starting to increasingly assess the implications of offshore provision - for example in the recent National Programme for IT contracts for the National Health Service, one of the winning consortia including offshore provider TCS, and the London Congestion Charge was in part developed via offshore IT service provider, Mastek.
3. New suppliers and locations
The past few years have seen the emergence of major offshore service providers such as Infosys, Wipro and TCS, with turnovers now in excess of $1 billion. The announcement in September of a $2.2 billion IT outsourcing deal by ABN Amro has been billed by many as a coming of age of the Indian offshore providers, with providers including Infosys and Patni acting alongside the established global brands of IBM and Accenture. This reflects both the growing confidence customers have in offshore providers, and also a move towards using consortia of providers to deliver large deals.
The Indian majors are only a part of the picture of proliferating offshore service provision options. The best illustration of the growing range of offshore providers will be the emergence over the next 5 years of Chinese services providers, such as Bleum, focusing in the short term in niche areas of software development and research.
With time, identifying the geographic location of offshore providers will become largely irrelevant (or impossible) because both established and emerging providers are embracing a distributed geographical model. They are setting up facilities across multiple countries, to take advantage of the specific skill pools and jurisdictional features of different locations, and dividing up different sub-processes amongst the most appropriate locations. The Indian majors are perhaps the best example of this trend, with onshore centres in the US and UK, nearshore centres in Canada and Eastern Europe, and farshore centres in India - and increasingly - in China.
4. Shrinking scale thresholds
As more firms and locations enter the market, keen competition is increasing the struggle for business, and reducing prices, in some offshoring sectors. At the same time, a growing pool of management experience and maturing delivery methodologies are enabling firms to take on smaller and riskier offshore deals. In addition, service providers are looking for new ways to pool demand from multiple customers, promoting standardised processes and 'on-demand' utility models.
All these factors taken together are having the effect of reducing the necessary critical mass for offshoring success, and encouraging smaller firms to enter the market. Five years ago, a typical offshoring business case may have been predicated on a base of 100-200 resources. Today it is not uncommon for business cases to be built around 30 or 50 resources; and, as a result, global sourcing is becoming more of an option for medium sized enterprises.
5. Receding backlash
As offshoring matures; it is becoming less and less controversial. The period from 2003-4 saw a high profile political and media 'backlash' against offshoring, driven by the fear that it would erode competitiveness and employment. Following a high point during the 2004 US Presidential campaign, most fears about the impact of offshoring have receded. In addition, many unions have adopted constructive long-term positions on offshoring that emphasise working with employers to manage the impact of offshoring, rather than opposing it altogether.
The media spotlight will remain on offshoring, particularly regarding compliance issues such as security and data protection (e.g., recent media stories in the UK focused on the disclosure of customer records to third parties). Additionally, offshoring strategies still require very thorough consultation and communication, with due consideration to the full range of stakeholder groups, such as employees, customers and local communities.
However, public scrutiny will be very much less intense as offshoring becomes increasingly accepted as business as usual. In this more permissive political climate, a freer and more candid assessment of offshoring strategies will be possible, and with time it may enable the offshoring of new sectors that currently remain 'off limits', e.g. sensitive R&D or the public sector work.
In Conclusion
What does this mean for businesses? Taken together, these trends mean that global sourcing is becoming a more relevant, accessible and important option for almost all businesses.
Offshoring is no longer 'just' about IT body shops or call centres, and no longer the exclusive preserve of the global multinationals. New locations and providers have entered the market, and new functions are being remotely sourced into a wider range of industries. For example in the legal services sector, relatively simple offshoring (e.g. basic drafting of contracts) is only just beginning to take off, but already it is enabling law firms to offer tiered pricing options and providing a cost advantage over competitors that are not yet sourcing globally. As the five trends continue to take hold, the impact in this and other sectors will become increasingly significant.
Decision makers need to understand the new opportunities and risks presented by the maturing offshore marketplace, and they should prepare their businesses accordingly. Above all, decision makers need to:
- Monitor offshoring trends - Regularly assess the relevance of offshoring for all functions; keeping track of developments by peer group organisations.
- Develop an offshore strategy - Where the global sourcing option is appropriate, develop an informed offshore strategy, based on a firm grasp of the risks and opportunities global sourcing presents. The strategy needs to be coherent across functions, rather than a set of tactical initiatives that may or may not make sense together.
- Follow through on the strategy - Recognise that delivery success is not guaranteed, and that high quality solution design, change management and operational capabilities are essential to realise the benefits of a global sourcing strategy.
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