Offshore outsourcing picking up after recession

As the global economy recovers, work that was outsourced locally is also now being moved to offshore locations

The outsourcing market is witnessing an increase in activity as the global economy recovers from the recession of 2009, according to a report by Everest Research Institute.

Offshore outsourcing business that was in the pipeline, but was delayed during the recession for financial reasons or for lack of management focus, is now gathering momentum again, said Anand Ramesh, research director at Everest.

[ Also on InfoWorld: "Customers want more than low cost from outsourcers." | Stay ahead of the key tech business news with InfoWorld's Today's Headlines: First Look newsletter. | Access InfoWorld from your iPhone or other mobile device at infoworldmobile.com. | Read Bill Snyder's Tech's Bottom Line blog for what the key business trends mean to you. ]

More concerned about cost reduction after the recession, customers in the U.S. and other markets are planning to offshore more of the work that was earlier being outsourced to suppliers in their countries, Ramesh said.

Companies that have not sent work offshore so far are also now considering outsourcing to low-cost locations like India and the Philippines, he added. Over a period, the credibility and scale of offshore suppliers in countries like India has also increased, Ramesh said.

Most current buyers plan to expand offshoring and a significant proportion plan to do so aggressively, the Everest report said. Approximately 75 percent of small and medium adopters and 90 percent of large adopters plan to expand their offshore outsourcing by more than 500 FTEs (full time equivalents) over the next two years, it added.

Small adopters are defined by Everest as organizations with already less than 500 FTEs offshore, while medium adopters are organizations with 500 to 2,500 FTEs offshore. Large adopters are organizations that already have more than 2,500 FTEs offshore.

The report surveyed companies that currently send IT services and business process outsourcing (BPO) work to either their own subsidiaries or to third-party suppliers in off-shore locations like India, Mexico, China, and the Philippines.

A number of analysts have forecast a pick up in offshore business. A lot of the offshore business that was delayed by the recession is back, said Sudin Apte [CQ], principal analyst at Forrester Research. But there are no large new deals yet, he said.

The improvement in business is also likely to place demands for staff in countries like India, thus pushing up costs. Companies in India, for example, have started hiring again, and staff attrition is likely to go up to over 15 percent in the current quarter, Apte said.

India continues to be the dominant offshore location with more than 70 percent of buyers planning to expand in the country, according to Everest. The Philippines, riding mainly on its strong presence in the BPO business, and China are two other key countries where companies plan to expand.

But the offshore market in China is primarily for work done for neighboring countries like South Korea and Japan, according to Ramesh. The number of U.S. companies outsourcing to China are few, and the size of their operations are small, he added.

Malaysia, Brazil, and Mexico are other locations that figure in companies’ plans to expand offshore outsourcing.

Companies are however looking to spread their risks, and may not send all their work to India.

Buyers are increasingly looking at other complementary locations in Asia, Latin and Central America, and Eastern Europe for setting up delivery centers, according to Everest. The drivers of this approach include risk diversification and business continuity, need for specific skills and support in specific languages, regulatory requirements, and time zone coverage requirements, Everest said.

About 60 percent of India’s outsourcing business comes from the U.S., followed by the U.K. which accounts for about 15 percent.

Even as companies are planning to expand offshore outsourcing, they are also looking at expanding in near-shore locations, such as Latin America for U.S. companies. The drivers for near-shore outsourcing, such as the need to keep sensitive work closer to home, are different than for off-shore outsourcing which is mainly driven by cost and the ability to scale, Ramesh said. Although it is growing fast, near-shore outsourcing is a smaller market than offshore outsourcing, and will not necessarily compete with the offshore locations for business, he added.

Even as companies expand near-shore and to other locations besides India, they may still turn to Indian service providers to provide services from these new locations, Ramesh said. They may value an existing relationship with an service provider rather than assign the business to a local provider, he added. A number of Indian outsourcers have set up operations in Europe, U.S. and Latin America to target the near-shore and onshore requirements of their customers.

From CIO: 8 Free Online Courses to Grow Your Tech Skills
Join the discussion
Be the first to comment on this article. Our Commenting Policies