Outsourcing Likely to Weather Economic Downturn

Top outsourcing firms have recently said that they are not concerned that the slowing world economy will negatively impact business. Most feel the downturn will force companies to use outsourcing as a way to save money.  In other news, a recent study found that India continues to be the leading country large enterprises go to for most of their corporate outsourcing tasks.

Focal Points:

• While IT spending growth in 2008 has certainly slowed down, executive from HCL Technologies Ltd. said that their conversations with corporate executives indicated that spending was going to either remain flat or increase for their outsourcing services. Officials from TPI stated that they were seeing a slowdown in decision making for services in the near term, but in the aggregate, they expected to see an overall increase in outsourcing spending by seven percent over 2007. Indian IT service providers also see companies from the United States taking advantage of changes in the dollar rate for cost arbitrage as a means of getting more money out of IT spending. Officials from WNS Global Services said they were seeing increases in outsourcing by consumer products, insurance, logistics, manufacturing, travel and utility companies.
• Recent published research reports showed that about $27 billion was earned in revenues by managed services companies in 2007.  The report showed that 64 percent of the money was associated with individual activities, while 36 percent of the revenues for managed services were part of larger outsourcing contracts for IT services.  Bundled managed services reached $35 billion for the top 25 global IT service providers. The increased revenues for managed services indicates a growing use of outsourcing, with increases in application management services, as well as business process outsourcing (BPO) functions, such as customer relationship management (CRM).
• A recent study by CyberMedia India Ltd. found that six of the top eight cities for worldwide outsourcing were located in India, with Bangalore being the top outsourcing location overall. Other Indian cities on the list included Chennai, Delhi National Capital Region, Hyderabad, Mumbai, and Pune. The two cities on the list not from India were Dublin, Ireland and Makati City, Philippines. However, China leads the list of cities that are the fastest growing for outsourcing activity. Of the top 50 emerging outsourcing cities worldwide, the United States had two cities on the list, Birmingham, Alabama and Oklahoma City, Oklahoma.

Experton Group believes many IT executives will look to outsourcing as a way to reduce operational costs. However, Experton Group cautions that most companies find outsourcing has hidden costs that companies often do not discover until later into an engagement, especially the costs of managing the outsourcing contract and data security. These costs can be up to 10 percent of the overall outsourcing contract. IT executives should consider the costs of monitoring outsourcing services when evaluating overall outsourcing costs.