Outsourcing 2009: is the writing on the wall?

One of the biggest issues the outsourcing industry is facing is a major case of the jitters. Despite the natural advantages of outsourcing - cost-cutting, headcount reduction and ability to refocus on core competencies - offering a major positive in troubled times, firms are naturally suspicious of each other, knowing that financial stability cannot be taken for granted.

You can evaluate the quality in terms of processes, but there are concerns on financial integrity and the quality of the company. Is it a family, private or listed company? What is the quality of its auditing? People are looking at the issues of the corporate governance of organizations and reputation.

In its recent report, Global Sourcing Trends in 2009, legal group Morrison Foerster concurs: "Consolidation in the service provider community may mean less leverage for customers in future negotiations, and the recent high-profile Satyam scandal in the Indian service provider market may prompt a ‘flight to quality' by outsourcing customers."

The outsourcing industry has additional battles to fight at the moment, one of those being the problem of rising unemployment. At a time when firms in all industries are shedding jobs at a rate of knots, the notion of outsourcing precious jobs to an offshore provider is losing much of its shine, particularly for those institutions surviving on government handouts.

In the US, as Morrison Foerster comments in its 2009 sourcing report: "The new administration of President Obama has an overt US jobs-creation policy. Combined with organized labor pressure and caps on visas, this could mean more outsourcing solutions biased towards onshore delivery."

Other jurisdictions, particularly in Europe, share this view; labor laws in countries such as Germany, for example, have long made outsourcing challenging. So with the Indian markets already struggling with a tarnished reputation, does this sound the death knell for offshore outsourcing?

The Tower Group's McDowall believes a strategic approach is called for, at least in the short-term. "If some can be done onshore, it sweetens the pill. Companies can outsource within the US, etc. The location where services are provided becomes sensitive due to the job situation. It may not be the most efficient or cost-effective solution for the outsourcing provider, but it may help them to keep business. They need to wait for conditions to change."

There are also other options for outsourcing providers keen to lower their costs and access the skill base they need to provide a competitive service to their clients. There are too many problems now associated with offshoring. "The issues that people have with offshoring are cultural differences, resources that are not as good as expected, creating overheads and communication problems, and people move companies easily for the right money.

Other issues are also putting pressure on the outsourcing providers. At a time when financial firms are putting all their energy into staying afloat, it is difficult to think strategically, and a long-term strategy is fundamental to any outsourcing deal. While firms may look at the cost-cutting benefits and hope for a short-term fix, this is often not the case.

In the current environment, there is a degree of knee-jerk cost-cutting, and there is a danger of jumping in too soon. We recommend that people look at outsourcing as a business transformation. There are still risks to manage including those related to data security and service quality, and we are anxious that clients may try to move too soon without looking at the traditional risks.

So, among all the doom and gloom, are there any rays of light for outsourcing providers? Yes, of course there are. It has often been the case that the trend towards outsourcing has risen during a recession, and although this time may turn out to be the exception, the drivers and benefits are still the same.

Companies are still looking for ways to decrease expenses significantly and quickly, to streamline operations and to reduce head count and save money. Outsourcing offers cost-cutting measures via, for example, offshore labor arbitrage, but also by enabling companies to shed fixed costs in favor of the variable pricing that characterizes many outsourcing deals.

This climate also provides opportunities for start-ups and these firms need to get up and running quickly, committing as little capital as possible to infrastructure.

Where concerns remain over the stability of service providers, some jurisdictions have already put measures in place that allow outsourcing but in a controlled way that affords additional protection for the outsourcer.

There is still much hope for the outsourcing industry, but the next year or two is likely to be a time of treading water. Few people would expect the remainder of 2009 to be a time where firms are able to think strategically enough to enter into long-term outsourcing arrangements. There may be good times around the corner, but it will be a case of who is left standing - providers and customers - to enjoy them when they arrive.