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A defining year

A defining year

During the current economic downturn, there could be unprecedented potential for outsourcing to address immediate cost pressures as well as long-term recovery goals.

As the global economy struggles to fully recover from the current recession, the outsourcing market is manifesting itself as a dichotomy, suggests research house Gartner. “On the downside, organisations’ cost-cutting outsourcing strategies may negatively impact market growth, but at the same time, the upside is that outsourcing will be adopted by more organisations to help them work through financial and competitive challenges,” says Allie Young, vice president and distinguished analyst at Gartner.

Young says there will be “unprecedented potential” for outsourcing to address immediate cost pressures as well as long-term recovery goals. However, organisations will become successful only if they are “diligent about understanding and avoiding the pitfalls of cost-focused outsourcing and that apply business-outcome-focused outsourcing”.

Re-evaluating contracts

The fifth annual Gartner on Outsourcing, 2008-2009 report indicates the global economic slump has meant that outsourcing clients are re-evaluating their contracts to improve efficiency and costs. The report suggests that, for organisations that are outsourcing, contract terms may be altered in response to corporate change. Some will downsize, others will expand, acquisition and divestiture will impact others, and still others will cease to exist.

Technology Partners International (TPI), the US-based outsourcing services provider, strikes a chord with Gartner. Speaking on the impact of the financial crisis on outsourcing in 2009, Gerry Clark, from TPI, says the company is predicting a soft demand for mega-deals (contract awards of US$1 billion or more). In fact, TPI does not foresee a near-term pickup in these larger contracts, but a steady tempo of smaller, more tactical contracting.

“The adoption of IT outsourcing in the first half of 2009, measured by total contract value levels, is expected to be softer than last year and more in line with the trajectory we saw in the second half of 2008,” says Clark, partner and director of TPI, Southeast Asia and Hong Kong. Looking forward, TPI projects that new IT contract awards in the first half of 2009 will continue to be shaped by the recession together with lingering effects of the Indian market challenges.

With more providers that have better capabilities, the industry stands prepared to respond quickly to these challenges.

“In many ways, 2009 will be a defining year for outsourcing as the industry steps up to help clients find near-term cost-realignment opportunities. The transactions may be more piece-meal in nature rather than big, transformational, multi-billion dollar deals,” Clark says.

On the global stage, the US-headquartered International Association of Outsourcing Professionals (IAOP) is taking the lead to facilitate outsourcing. It works with the joint forces of leading outsourcing customers, providers and advisors to exchange thought leadership, share best practices and network to maximise their effectiveness using outsourcing as a management tool.

The skills gap

As Sidney Yuen, chairman of the IAOP’s Hong Kong chapter, explains, IAOP can benefit organisations by training and certifying their outsourcing managers.

In-house outsourcing managers, says Yuen, are usually responsible for selecting an outsourcing provider, developing a governance structure, and looking at the strategies of building a relationship with the outsourcee.

These are the key elements in outsourcing, as most of the outsourcing deals fail because of the ‘skills gap’—not being equipped with the required skills to manage relationships or governance, or to look at the legal contracts and service-level agreements. “What is happening here [in Hong Kong] is we are beginning to see more [companies] looking for an outsourcing provider, purely because they know outsourcing is going to help reduce their operating cost, and there are no cutbacks required,” says Yuen.

Growth, not reduction

The most popular outsourcing activities in Hong Kong have been IT, call centre, financial and business process outsourcing. However, with the current economic hardships, some outsourcing managers have become hesitant in launching high-profile outsourcing activities, possibly for fear of local labour unions, and also as a response to the government’s earlier notifications to large corporations calling for corporate social responsibility and avoiding staff layoff.

IAOP Hong Kong chapter’s Yuen is keen to clear the ‘misconception’ that ‘outsourcing equates staff retrenchment’. He explains: “For some of the more progressive companies which look at outsourcing as more strategic in nature, outsourcing means not just reduction of costs, but growth as well.”

“There is a dilemma here”, says Yuen, “because there is the public perception that outsourcing means laying off internal staff. So there is a resistance from middle management. They misinterpret outsourcing as equating to layoffs, and our chapter is trying to educate the business leaders and middle management that outsourcing is not about that. It is about growth; it is about rationalising the business processes so that they can become more competitive in the market.”

On 4 February, TPI held its fifth semi-annual TPI Index conference call that focused on the Asia Pacific, covering the second half of 2008 and the full-year 2008.

According to the TPI Index, the weak second half performance in terms of outsourcing contracts worth more than US$25 million in the Americas, Europe, the Middle East and Africa (EMEA) was not seen in the Asia Pacific.

Uptake in contract awards

Unlike US and EMEA, after a remarkably soft first half, the Asia Pacific saw an uptake in both the number of contract awards and their values in the second half of 2008.

“It remains to be seen whether this strong performance will continue into 2009 or whether it is another example of the up and down nature of the Asia-Pacific market,” says Clark.

The same TPI Index study shows that in 2008, India represented more than 50 per cent of the total outsourcing contract value for the Asia Pacific. Despite other countries redoubling their efforts to take up opportunities from India, no other country yet presents a serious threat as a key outsourcing destination.

“China is still very much an emerging destination, while it is debatable whether any other single country has the breadth and depth of skills, experience and infrastructure to seriously challenge India’s position. Notwithstanding that, the Philippines continues to emerge in the BPO [business process outsourcing] sector with strong growth in both voice and non-voice BPO work now being delivered from the country to other destinations globally,” says Clark.

The Obama stance

Clark believes that the election of president Barack Obama, who says he plans to focus on keeping jobs in the US, will have little impact on outsourcing. But major outsourcing provider nations can expect increased levels of outsourcing activity in the second half of this year. He says: “We expect the initiatives of the Obama administration, coupled with the possible emergence of tax-favourable policies to encourage neutralisation of the wage imbalance for certain functions, to fuel increased evaluation of domestic outsourcing.”

The same sort of market-stimulus actions may be seen in other regions, notably China and Latin America. The outsourcing industry will lobby hard to seek an extension of the tax benefits in India under the Software Technology Parks of India group in view of the current market conditions, suggests Clark.

“Given the high rate of unemployment in the US, a growing trend towards government investment in certain industries and a tendency towards protectionism, expect that outsourcing and/or offshoring activity to be tempered in the short term,” Clark says.

‘However, corporate imperatives to reduce operational costs with minimal or no capital injection, coupled with pressure to enhance productivity and capability, will overcome this initial hesitation, and we expect increased levels of outsourcing activity during the latter half of 2009.”

Major risks

Speaking of risks, Clark advises that enterprises need to understand the business objectives of why they should consider outsourcing as a strategic tool and what are the benefits and risks associated in trying to meet these corporate objectives.

“The important factor is to define the sourcing strategy before embarking on any potential sourcing initiative. This strategy should consider both internal and external options as well as the choice of delivery locations,” he says.

In addition to successfully managing these types of transactions, organisations need to consider the ongoing role of service management and governance. They need to know what capabilities, methodologies and tools are needed to prepare the organisation to manage the outsourcing relationship and ensure the business benefits are indeed realised, advises Clark. MIS Asia

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