What a difference a year makes. A 2009 study of American chief financial officers in U.S. high-tech companies predicted the new hot location was the United States. The 2010 study discovered the opposite: China and India regained their position as the primo offshoring locations for IT services, according to Don Jones, Partner, International Tax Services at BDO, assuming the positions they had in 2008. The study asked general questions about outsourcing and did not distinguish between ITO and BPO services.
According to the BDO 2010 Technology Outlook Survey, this year China will be the leading location for future outsourcing in the high-tech industry. Twenty-eight percent of the U.S. respondents said they were looking at Chinese service providers. Southeast Asia (mainly the Philippines and Malaysia) was the second favorite at 22 percent; India was a close third at 20 percent. By contrast, last year the United States topped the list by a long shot at 22 percent.
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“Last year, fraud issues and international strife caused U.S. companies to focus on domestic services as opposed to outsourcing,” Jones reports. Changes in the tax laws also hindered growth. In addition, the infrastructure in both countries didn’t develop as quickly as U.S. outsourcing buyers expected, he adds.
“So chief financial officers (CFOs) started to look at the United States as an outsourcing destination,” he reports. The American labor market suddenly “wasn’t as tight,” so outsourcing buyers could afford American labor. “And they were hearing a lot of noise that outsourcing to India and China was pummeling customer service,” he says.
The outlook changed in the last 12 months. “The economy significantly squeezed margins. U.S. high-tech companies are going back to the low-cost destinations to cut their operating costs,” Jones reports. He adds that some survey respondents stated they are “now willing to accept customer satisfaction as it is.”
Jones predicts that this year Asia and India will be the leading outsourcing locations because “both regions have already built the necessary infrastructure to quickly support increased demand.” In a way, it’s back to the future.
CFOs approve offshoring to more locations today
The 2010 numbers reflect the 2008 findings with one difference: CFOs now approve outsourcing to more locations. “CFOs are looking at new destinations. The Mumbai attacks rattled American companies. They want to send work to countries with political stability,” Jones says. Diversification also mitigates risk, he adds.
For example, 60 percent of the offshoring work went to India in 2008. This year the number is down to 36 percent. China has stayed relatively the same, at about 45 percent. And U.S. destinations in affordable cities continue to grow as outsourcing hot spots.
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As the French proverb says, the more things change, the more they stay the same. In challenging economic times, having first-mover position is advantageous. But there is also room for newcomers in the offshore location game.
Lessons from the Outsourcing Journal:
- BDO’s annual technology survey of high-tech companies found 2010 will mirror 2008 when it comes to offshore outsourcing locations: China and India will garner almost 80 percent of the high-tech business because of their low-cost offerings.
- According to BDO’s survey, some American buyers are willing to accept lower customer satisfaction numbers in their quest for cost savings.
- India is no longer the monolith offshore leader like it was in 2008 as U.S. CFOs now diversify their approval of offshore locations.
- U.S. service providers continue to gain market share in the high-tech industry.
How the study was done: Market Measurement, Inc., an independent market research consulting firm, conducted the ITO study. Its executive interviewers spoke directly to 100 chief financial officers. Market Measurement used a telephone survey performed within a scientifically developed, purely random sample of U.S. technology companies in the software, hardware, telecommunications, Internet, and information technology services subsectors. The companies surveyed had revenues up to $10 billion. The survey questions were general and did not distinguish between ITO and BPO services.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].