Offshore outsourcing in 2002 reached the status of a proven paradigm. Already a key component of strategic goals for many large U.S. companies, small to mid-size companies also are now finding ways to reap the cost-cutting and efficiency benefits of this business transformational model.
Nevertheless, it's clear that the dynamics of global economic and geopolitical challenges have impacted this market during the past year. The ripple effect of three major trends in 2002 are impacting this market going forward.
Moving the Back Office to the Four Corners of the Earth
Business process outsourcing (BPO) - especially for human resources (HR), finance/accounting (F&A), call centers, medical transcription and billing functions - spread offshore during 2002 like wildfire. In fact, according to the 2002 Nasscom-McKinsey study, the market for "information technology-enabled services" in India has been growing at a blazing 70 percent over the past two years.
Ray Bayley, CEO of Brigade Corporation, which has operation centers in India for some of its customer relationship management, HR and F&A solutions, believes the increased willingness of companies to send such back-office functions offshore is an awareness of the quality of offshore labor forces. "Over the last year, we've seen a shift from simpler rules-based transaction work to more complex, discretionary work; and I think it will continue," he says.
A BPO trend that really took hold in 2002 is the development of offshore operations by major U.S. firms.
"Name-brand companies, either through direct investment or partnerships and joint ventures, have established significant offshore delivery capabilities," states Stephen Lane, research director of IT Services for Aberdeen Group. "Within their ranks, these firms have immigrants from India, Russia, China, Yugoslavia, Belarus - you name it - who have gone back to their home countries and tapped into their networks."
Major U.S. outsourcing providers, such as Accenture and Hewlett-Packard (HP), also have established operating centers offshore in order to drive out costs from their own operations and offer cost-reduction capabilities for their customers.
Due North or Due South - The Nearshore Option
The expansion of offshore activity is not limited to "farshore" locales, such as India and Russia, of course. "Nearshore" sites also saw opportunities expanding in 2002. According to Frank Koelsch, president and CEO of Everest Group, Canada, the combination of seamless communication and cultural kinship is boosting the prospects for Canadian outsourcing providers.
"Canadians by and large are highly educated; and we have a very modern, comprehensive national infrastructure both of telecom and IT that is highly meshed with the U.S.," said Koelsch. "As a result, it's possible to provide redundant, fail-safe and seamless delivery of services that is more challenging to provide in other countries."
Koelsch reports growing interest in BPO in Canada in 2002, particularly for human resources and call center work.
Jim Wardrup, director of strategic initiatives and global influencers at Hewlett-Packard, reports clients look for a seamless operation where offshore services are a component of the HP offering and rely on the provider's global communication systems and redundancy capabilities.
But with the threat of war in Iraq, continuing post-9/11 cautiousness and additional pockets of geopolitical unrest, many companies perceive the nearshore outsourcing options to be lower risk. From country to country, offshore outsourcers are dealing with varying infrastructure, workforce and political issues that weigh on their ability to deliver services.
According to Steve Sullivan, president of enterprise managed services at Getronics, there is a tremendous reluctance to outsource to areas that are believed to be security risks. "Clients ask us what we will do from a business continuity perspective if we have some services delivered out of the Philippines, for example. Before September 11, we had a client that wanted us to locate a set of services to be delivered out of India or out of Malaysia," Sullivan recalls. "They had identified Mexico as a distant third option. Then the events of September 11 took place, and the client put Mexico on the front burner."
Sullivan also cites the "fairly consequential upfront investment" required to open facilities in another country. "We need to be sure it's in a fairly stable location politically." He says the risk in some locations is high enough that Getronics is "sticking closer to home. We found that the labor rates in Mexico are very much on par with the labor rates in India, and their infrastructure is solid enough that we can deliver services. So Mexico has become our de facto low-labor cost location. Canada is not quite as inexpensive as Mexico, but it still runs more than 30 percent less than the U.S."
Some companies are now moving to Costa Rica as their nearshore location. Others minimize risk by staying even closer to home and using Native American services to achieve cost-reduction objectives.
Providers Are All Over the Map - But Not All Are Experts
One result of the increasing adoption of the offshore outsourcing model is a proliferation of new service providers. The competitive market results in lower prices for buyers; but Kishore Mirchandani, president of Outsource Partners International (OPI), a U.S.-based finance and accounting outsourcer with operations in India, stresses the need to select providers carefully.
"A lot of IT services companies in India are going into BPO, but they really don't have domain expertise," said Mirchandani. "Companies looking to outsource ought to look very carefully at the expertise of the team that will be offshoring their processes."
With so many players emerging, finding a way to differentiate service offerings is becoming increasingly important to providers. "I think the trend for the market overall is moving from commodity-type offerings, where everybody can do everything, to work in certain industries and certain technologies," said Dmitry A. Loschinin, chief executive officer of LUXOFT, a Russian outsourcing company that provides software-related services and turnkey solutions to such clients as Boeing, Dell and IBM.
Ultimately, say analysts and providers, a successful outsourcing relationship will depend on the company, not the country. OPI's Mirchandani agrees. "Offshore is just a destination," he says. "You can do outsourcing in Minnesota, or you can outsource to Jamaica. It's the people who are involved behind the scenes. It's the company."
Aberdeen Group's Stephen Lane adds, "At the end of the day, it's their skills, their processes and their financial viability that are most important."
Offshore Outsourcing Trends for 2003:
- Major U.S. outsourcing providers are establishing operating centers offshore in order to drive out costs from their own operations and offer cost-reduction capabilities for their customers.
- Both buyers and service providers are outsourcing to nearshore locations as an option to minimize risks in business continuity in locations of geopolitical unrest.
- The proliferation of new service providers or companies expanding their IT services to include BPO has the outcome of competitive prices for buyers but also a crucial need to ensure the provider has domain expertise.