The financial crisis and global recession will accelerate adoption of global outsourcing and offshoring as strategic business tools as organisations respond to economic adversity with a forceful push toward cost-reduction according to leading sourcing advisory firm EquaTerra. Factors expected to impact outsourcing and offshoring over the next year are:
Globalisation will continue but at a slower pace: Numerous factors, including the severe global economic downturn, repeated product health/safety scares related to Chinese goods, a collapse of commodity prices (critical to supporting many emerging market economies) and the election of a new U.S. administration concerned with the loss of domestic jobs will slow globalisation and one of its key manifestations, the global sourcing of services. But the compelling business benefits of global sourcing, especially in tough economic times, will continue to drive growth.
Reassessment of current global outsourcing strategies/destinations: As buyer focus shifts to cost reduction and cost avoidance, organisations will carefully analyse current and future outsourcing efforts and service provider partners to ensure they are getting services from the most cost-effective location.
Steep learning curves: As buyers turn to outsourcing/offshoring to help weather economic turbulence, they will need to consider mitigating factors, including service provider capacity levels, prior direct experience and whether engaging a service provider expands or consolidates the supplier base, supplier consolidation/rationalisation is viewed as a means to gain economies of scale, reduce overall costs and speed implementation of new efforts to meet shorter term business needs.
Volatility in foreign exchange markets: Outsourcing buyers and sellers must become more effective/efficient at hedging against currency fluctuations that often negatively impact local currencies in emerging markets, creating instability in cost structure/pricing/profit margins. The seesawing value of the dollar will make calculating the true costs of outsourcing/offshoring more complicated, challenging buyers and service providers to plan/project longer-term pricing, cost and profitability levels. Efforts to do this should include explicit contractual contingencies and, when possible, spreading global service delivery efforts across multiple markets.
Wage inflation in offshoring markets will abate, at least temporarily: As Western markets pause to digest events and determine a go-forward strategy,demand for global outsourcing services will slow temporarily, curbing the recent trend toward wage inflation in offshoring markets and helping top outsourcing destinations remain competitive.
Evolving outsourcing business model: Buyers will continue to shift away from the use of project-based contract labor in favor of longer term, formalised outsourcing relationships. By committing to longer term and larger scale deals, buyers can get better pricing from service providers, better levels of service and lock-in longer term cost savings strategies.
Move toward flexible service delivery models and acquiring in-house skills needed to manage sourcing successfully: As buyers gain outsourcing/offshoring management experience, they will seek greater flexibility in service delivery models to fit form to function and tasks. The result will be a mix of domestic, nearshore and offshore shared services/captive centres and other outsourcing efforts that will evolve with the marketplace. Organisations will also place greater emphasis on defining, acquiring and transferring skills needed to successfully govern outsourcing/offshoring efforts.
Monday, November 17, 2008
Thursday, November 13, 2008
Outsourcing one bright light in sea of global gloom
Business outsourcing may not be the most glamorous industry in the world but it is one of the few bright lights amid the doom and gloom of the global financial crisis.
The two countries which have benefited the most from outsourcing, India and the Philippines, expect to see some initial pain from the financial turmoil but the industry is confident it will ride out the storm.
In the Philippines the business process outsourcing (BPO) industry expects growth this year of between 35-40 per cent on revenues of around seven billion dollars.
"We are part of the solution, not part of the problem," Oscar Sanez the chief executive of the Business Processing Association of the Philippines (BPAP) said in a recent interview.
The BPO sector expects annual growth of around 40 per cent with revenues hitting 12 billion dollars by 2010 and employing one million people compared with 300,000 this year.
In India, where the industry generates some 40 million dollars in annual export revenues, the story is much the same although it admits that it could expect some initial pain.
The sector traditionally views bad times as offering opportunities as Western companies cut costs by moving work to cheaper destinations offshore.
India leads the world when it comes to outsourcing with more than half the global business while the Philippines is a distant second with around 10 per cent.
Both countries place a great deal of importance on the sector as its growth creates jobs and much-needed revenue.
Rick Santos, the Philippine country chairman for global property services company CB Richard Ellis, told AFP that the crisis would "actually drive more BPO business to the Philippines".
"You will see many more companies having to go offshore just to survive," he said.
He said he expects about 502 million square metres (5.4 billion square feet) of Philippine office space to be leased this year, up 52 per cent from 2007.
India and the Philippines are the preferred destinations for European and American banks and IT companies for outsourcing their back room and call centre operations due to the highly educated work force and English speaking skills in both countries.
Sanez said that despite the financial turmoil he was confident the BPO industry in the Philippines will continue to see growth.
"Judging from the investor meetings we've been having recently our clients will want to ramp up their outsourcing activities in order to accelerate cost savings," he said.
"The Philippines is in a very strategic position due to its strong and successful experience with BPO particularly with large American and British multinationals giving it a high level of credibility and trust especially in critical times."
He conceded that in the short term there could be a "bit of distraction" due to management and ownership realignments in the banking sector.
"But this should not affect outsourcing operations as these are critical functions especially those that connect with customers," he said.
Some 85 per cent of the BPO business in the Philippines is in banking and comes mainly from the US.
In India the BPO industry expects there will be a short to medium term impact on the sector as much of its business is IT-related.
Some of the pain from the bankruptcy of Wall Street giant Lehman Brothers, the sale of Merrill Lynch and the US government's bailout of insurance giant AIG -- all ravaged by credit woes -- is already being felt, according to industry sources.
But it's still very much a mixed picture in India where companies are at best "cautious" on the outlook for the sector and not peering too far into the future because they say that all the dominoes have yet to fall.
The main industry body said it will look at its sales forecast for this financial year to March 31, 2009, in December -- and says it may be revising expectations downward.
But it's not looking any further forward than the current year in number terms, it said.
Sales growth could fall below 20 per cent this year from 28 per cent last year while decisions on new projects have come to a virtual halt, said Som Mittal, head of the National Association of Software and Services Companies (Nasscom).
"New projects are always the first to feel the hit," said Mittal.
He said sales growth has slowed but added: "Companies are hiring from university campuses for the next quarter," although the frenetic pace has slowed.
"We've got to pay attention to other parts of the world like Japan and the Middle East," said Mittal. "There is no way we can rely so heavily on the US."
Some 60 per cent of India's outsourcing work comes from the US and 30 per cent from Europe with the rest of the world contributing just 10 per cent.
However, Indian firms doing legal outsourcing work are experiencing a mini-boom as a result of the financial turmoil with US bankruptcies, mergers and acquisitions growing by the day and demand growing for help with litigation.
Legal work in India costs a tenth of what US lawyers charge.
Sanez also believes there are many industries outside the banking sector that can be tapped for new business.
"Industries like construction, food, retail and distribution, high tech, heavy industries and the pharmaceutical sectors have yet to be tapped," he said.
The two countries which have benefited the most from outsourcing, India and the Philippines, expect to see some initial pain from the financial turmoil but the industry is confident it will ride out the storm.
In the Philippines the business process outsourcing (BPO) industry expects growth this year of between 35-40 per cent on revenues of around seven billion dollars.
"We are part of the solution, not part of the problem," Oscar Sanez the chief executive of the Business Processing Association of the Philippines (BPAP) said in a recent interview.
The BPO sector expects annual growth of around 40 per cent with revenues hitting 12 billion dollars by 2010 and employing one million people compared with 300,000 this year.
In India, where the industry generates some 40 million dollars in annual export revenues, the story is much the same although it admits that it could expect some initial pain.
The sector traditionally views bad times as offering opportunities as Western companies cut costs by moving work to cheaper destinations offshore.
India leads the world when it comes to outsourcing with more than half the global business while the Philippines is a distant second with around 10 per cent.
Both countries place a great deal of importance on the sector as its growth creates jobs and much-needed revenue.
Rick Santos, the Philippine country chairman for global property services company CB Richard Ellis, told AFP that the crisis would "actually drive more BPO business to the Philippines".
"You will see many more companies having to go offshore just to survive," he said.
He said he expects about 502 million square metres (5.4 billion square feet) of Philippine office space to be leased this year, up 52 per cent from 2007.
India and the Philippines are the preferred destinations for European and American banks and IT companies for outsourcing their back room and call centre operations due to the highly educated work force and English speaking skills in both countries.
Sanez said that despite the financial turmoil he was confident the BPO industry in the Philippines will continue to see growth.
"Judging from the investor meetings we've been having recently our clients will want to ramp up their outsourcing activities in order to accelerate cost savings," he said.
"The Philippines is in a very strategic position due to its strong and successful experience with BPO particularly with large American and British multinationals giving it a high level of credibility and trust especially in critical times."
He conceded that in the short term there could be a "bit of distraction" due to management and ownership realignments in the banking sector.
"But this should not affect outsourcing operations as these are critical functions especially those that connect with customers," he said.
Some 85 per cent of the BPO business in the Philippines is in banking and comes mainly from the US.
In India the BPO industry expects there will be a short to medium term impact on the sector as much of its business is IT-related.
Some of the pain from the bankruptcy of Wall Street giant Lehman Brothers, the sale of Merrill Lynch and the US government's bailout of insurance giant AIG -- all ravaged by credit woes -- is already being felt, according to industry sources.
But it's still very much a mixed picture in India where companies are at best "cautious" on the outlook for the sector and not peering too far into the future because they say that all the dominoes have yet to fall.
The main industry body said it will look at its sales forecast for this financial year to March 31, 2009, in December -- and says it may be revising expectations downward.
But it's not looking any further forward than the current year in number terms, it said.
Sales growth could fall below 20 per cent this year from 28 per cent last year while decisions on new projects have come to a virtual halt, said Som Mittal, head of the National Association of Software and Services Companies (Nasscom).
"New projects are always the first to feel the hit," said Mittal.
He said sales growth has slowed but added: "Companies are hiring from university campuses for the next quarter," although the frenetic pace has slowed.
"We've got to pay attention to other parts of the world like Japan and the Middle East," said Mittal. "There is no way we can rely so heavily on the US."
Some 60 per cent of India's outsourcing work comes from the US and 30 per cent from Europe with the rest of the world contributing just 10 per cent.
However, Indian firms doing legal outsourcing work are experiencing a mini-boom as a result of the financial turmoil with US bankruptcies, mergers and acquisitions growing by the day and demand growing for help with litigation.
Legal work in India costs a tenth of what US lawyers charge.
Sanez also believes there are many industries outside the banking sector that can be tapped for new business.
"Industries like construction, food, retail and distribution, high tech, heavy industries and the pharmaceutical sectors have yet to be tapped," he said.
Tuesday, November 11, 2008
Recession set to boost outsourcing
Survey of more than 200 outsourcing service suppliers finds 40-plus percent of those polled had seen increased demand levels, despite economic downturn.
Demand for outsourcing is set to outpace business investments in hardware and software as the recession hits home, says a new survey.
The survey, compiled among more than 200 outsourcing service suppliers, including companies such as Accenture, Atos Origin, Capgemini, IBM, Infosys, and Wipro, and EquaTerra's own consultants, found that more than 40 percent of those polled had seen increased demand levels, despite the economic downturn.
Demand was stronger in Europe than North America (64 percent of E.U. advisors cited increased demand compared to 25 percent in the Americas). However, 38 percent cited economic conditions as causing buyers to slow or defer outsourcing efforts.
The survey suggests that outsourcing projects are changing, with a strong focus on quick return on investment replacing longer-term initiatives to improve end-to-end business processes.
Martyn Hart, chairman of the National Outsourcing Association, says, "Outsourcing has always been associated with cost savings and now with all companies setting aggressive cost saving targets for next year we may see more and more outsourcing contracts come to fruition."
There is a also a longer-term trend toward supplier rationalization in order to simplify sourcing and governance efforts. This is because buyers are seeing an increased cost and complexity from employing multiple providers in overlapping functional areas. As Hart explains: "With the focus moving back onto cost as the main deciding factor in outsourcing, having one outsourcing supplier will minimize management, due diligence and supplier selection costs."
Stan Lepeak, EquaTerra's managing director of global research, explains that "leveraging software tools to automate and improve governance operations will be central to achieving business case objectives for multi-provider outsourcing efforts."
Demand for outsourcing is set to outpace business investments in hardware and software as the recession hits home, says a new survey.
The survey, compiled among more than 200 outsourcing service suppliers, including companies such as Accenture, Atos Origin, Capgemini, IBM, Infosys, and Wipro, and EquaTerra's own consultants, found that more than 40 percent of those polled had seen increased demand levels, despite the economic downturn.
Demand was stronger in Europe than North America (64 percent of E.U. advisors cited increased demand compared to 25 percent in the Americas). However, 38 percent cited economic conditions as causing buyers to slow or defer outsourcing efforts.
The survey suggests that outsourcing projects are changing, with a strong focus on quick return on investment replacing longer-term initiatives to improve end-to-end business processes.
Martyn Hart, chairman of the National Outsourcing Association, says, "Outsourcing has always been associated with cost savings and now with all companies setting aggressive cost saving targets for next year we may see more and more outsourcing contracts come to fruition."
There is a also a longer-term trend toward supplier rationalization in order to simplify sourcing and governance efforts. This is because buyers are seeing an increased cost and complexity from employing multiple providers in overlapping functional areas. As Hart explains: "With the focus moving back onto cost as the main deciding factor in outsourcing, having one outsourcing supplier will minimize management, due diligence and supplier selection costs."
Stan Lepeak, EquaTerra's managing director of global research, explains that "leveraging software tools to automate and improve governance operations will be central to achieving business case objectives for multi-provider outsourcing efforts."
Monday, November 10, 2008
Indian cos to cut IT spend by up to 30%
Indian enterprises in the several key sectors are seen cutting spending on information technology by up to 30% this year as they try to cope with lower demand for their products and services in a slowing economy.
IT heads at leading banks, retailers and public sector companies have started deferring new technology investments, such as on unified communication, and pared annual IT budgets, Chief Information Officers (CIOs) and analysts say.
Economists estimate India’s GDP growth to moderate to 7-8% in 2008-09 from 9% in the previous financial year. ET spoke to five CIOs in the banking, finance, retail and government verticals, who confirmed that that the budget cuts were underway.
“We have postponed our investment in unified communications infrastructure, which could have cost us a few crore,” the IT head of a leading public sector bank said requesting anonymity. His bank spends over Rs 100 crore annually on IT, and he said that it could be down to around Rs 75 crore this year.
Last year, Indian companies spent almost $ 5.6 billion (Rs 26,600 crore) on software services and applications. Total domestic spending on IT, including hardware and BPO services, was around $16 billion for the year ended March 2008. “CIOs are cutting their budgets by anywhere between 20 and 30%, and in some cases even more,” said consulting firm Browne and Mohan managing partner TR Madan Mohan.
The domestic market, which grew at over 25% last year, is expected to slow down to a 15% rate this year because of lower enterprise IT spending, Mr Mohan added.
Many retailers, who were running pilot projects evaluating new technologies such as RFID, have halted them. “The management does not have patience for pilots anymore. I have been asked to stay away from all new investments and only focus on maintaining the existing systems,” a CIO said.
IT heads at leading banks, retailers and public sector companies have started deferring new technology investments, such as on unified communication, and pared annual IT budgets, Chief Information Officers (CIOs) and analysts say.
Economists estimate India’s GDP growth to moderate to 7-8% in 2008-09 from 9% in the previous financial year. ET spoke to five CIOs in the banking, finance, retail and government verticals, who confirmed that that the budget cuts were underway.
“We have postponed our investment in unified communications infrastructure, which could have cost us a few crore,” the IT head of a leading public sector bank said requesting anonymity. His bank spends over Rs 100 crore annually on IT, and he said that it could be down to around Rs 75 crore this year.
Last year, Indian companies spent almost $ 5.6 billion (Rs 26,600 crore) on software services and applications. Total domestic spending on IT, including hardware and BPO services, was around $16 billion for the year ended March 2008. “CIOs are cutting their budgets by anywhere between 20 and 30%, and in some cases even more,” said consulting firm Browne and Mohan managing partner TR Madan Mohan.
The domestic market, which grew at over 25% last year, is expected to slow down to a 15% rate this year because of lower enterprise IT spending, Mr Mohan added.
Many retailers, who were running pilot projects evaluating new technologies such as RFID, have halted them. “The management does not have patience for pilots anymore. I have been asked to stay away from all new investments and only focus on maintaining the existing systems,” a CIO said.
Monday, November 3, 2008
India’s Outsourcing Market
Technology has made the world a global village and this impact is felt not only by the common man but also by the companies in developed countries especially the United States. The phenomenon of outsourcing refers to shifting the non-core jobs of an organization to another organization usually located in a different geographical location in order to increase efficiency and reduce costs.
This phenomenon certainly benefited a lot from the modern networking and communication technologies since it has become very easy for companies located in different parts of the globe to coordinate and cooperate to get the work done in other regions where labor costs are relatively lower and ample skilled labor is available.
Outsourcing in India
One of the countries commonly referenced with the word outsourcing is India which is one of the fastest growing economies of the world today. India has an immense pool of skilled labor and educated people who have a good knowledge of English and are willing to work at relatively lower wages than an average source in say Europe or USA.
All these factors have combined to make India the outsourcing king of the world. Figures from National Association of Software and Service Companies (Nasscom) which is the primary association representing the IT industry in India, noted that India would earn approximately US $ 60 billion by the end of this decade, through the outsourcing exports, and the rate of growth of outsourcing industry would be in the region of nearly 33%.
From this projected growth of 60 billion US dollars, nearly one third would be from IT services and software exports while another one sixth would be from business process outsourcing and call center businesses. In fact so great is the projected growth that the current educational infrastructure would not be able to deal with the shortage of skills and by the end of the current decade; India would be short by nearly half a million of trained workforce for the outsourcing industry.
Figures also show that during the first half of the last year (i.e. 2007) India far surpassed other major players in the Asia Pacific region, namely Japan and Australia, bagging nearly 30% of the contracts while Japan and Australia followed suit by having a share of 22 % and 2% respectively.
The Downside
Despite such heavy growth and potential for further growth, some experts also express reservations about this trend of outsourcing being continued in the long run. There are several reasons cited for these doubts. One strong reason is that with the rise of outsourcing and relatively lower rise in skilled manpower availability, the wages are tending to rise. Since cost savings is one of the major lucrative factors which govern the choice of outsourcing destinations it would go against India in the longer run.
It is estimated that work which cost somewhere in the region of 125 USD per month now costs somewhere in the region of 200 USD per month. This may not seem to be a significant rise but given the number of workers this is certainly a cause for concern.
Nations such as Malaysia, China, Mexico, New Zealand, West Africa and so forth are becoming equally lucrative as outsourcing markets. This would certainly affect the position of India though there is no such danger that outsourcing will be fully gone in favor of these countries. India with its vast supply of skilled English speaking population and a good infrastructure of educational institutes does have the assurance that at least in the near future its position will be very strong regarding outsourcing.
The The fears of the Indian outsourcing market being eroded are echoed in the research findings from research firm Gartner Inc which states that unless something is done about rising wages and labor shortages in India, that companies abroad would certainly be shy of outsourcing to India in the future. They cite the example of Ireland to prove that even Ireland lost substantial outsourcing business due to such problems and India was at advantage at that point, but now Ireland will be at the receiving end if these trends continue.
Data Center Outsourcing & India
When we talk about outsourcing we normally mean IT services, business process outsourcing, legal process outsourcing and so forth, but this discussion cannot be complete without discussing the aspects of data center outsourcing as well. Now logically we might think that data centers would be the last thing a company would like to outsource mainly because of confidentiality issues relating to the vital and important data which is stored on the servers of a company.
The main reasons which prompt parent companies to outsource data center services include complexity of business demands in the current technological arena, data growth, staffing issues and so forth. Though currently India only holds about 2% market share of the total data center outsourcing business, it is expected to grow by nearly 22% in the years to come. These data center operations which are given by foreign companies to specific vendors are also known as managed service providers or MSPs. In recent months we have heard of several major players in the market such as IBM and HP developing global data centers for the purpose of managed data center services.
This phenomenon certainly benefited a lot from the modern networking and communication technologies since it has become very easy for companies located in different parts of the globe to coordinate and cooperate to get the work done in other regions where labor costs are relatively lower and ample skilled labor is available.
Outsourcing in India
One of the countries commonly referenced with the word outsourcing is India which is one of the fastest growing economies of the world today. India has an immense pool of skilled labor and educated people who have a good knowledge of English and are willing to work at relatively lower wages than an average source in say Europe or USA.
All these factors have combined to make India the outsourcing king of the world. Figures from National Association of Software and Service Companies (Nasscom) which is the primary association representing the IT industry in India, noted that India would earn approximately US $ 60 billion by the end of this decade, through the outsourcing exports, and the rate of growth of outsourcing industry would be in the region of nearly 33%.
From this projected growth of 60 billion US dollars, nearly one third would be from IT services and software exports while another one sixth would be from business process outsourcing and call center businesses. In fact so great is the projected growth that the current educational infrastructure would not be able to deal with the shortage of skills and by the end of the current decade; India would be short by nearly half a million of trained workforce for the outsourcing industry.
Figures also show that during the first half of the last year (i.e. 2007) India far surpassed other major players in the Asia Pacific region, namely Japan and Australia, bagging nearly 30% of the contracts while Japan and Australia followed suit by having a share of 22 % and 2% respectively.
The Downside
Despite such heavy growth and potential for further growth, some experts also express reservations about this trend of outsourcing being continued in the long run. There are several reasons cited for these doubts. One strong reason is that with the rise of outsourcing and relatively lower rise in skilled manpower availability, the wages are tending to rise. Since cost savings is one of the major lucrative factors which govern the choice of outsourcing destinations it would go against India in the longer run.
It is estimated that work which cost somewhere in the region of 125 USD per month now costs somewhere in the region of 200 USD per month. This may not seem to be a significant rise but given the number of workers this is certainly a cause for concern.
Nations such as Malaysia, China, Mexico, New Zealand, West Africa and so forth are becoming equally lucrative as outsourcing markets. This would certainly affect the position of India though there is no such danger that outsourcing will be fully gone in favor of these countries. India with its vast supply of skilled English speaking population and a good infrastructure of educational institutes does have the assurance that at least in the near future its position will be very strong regarding outsourcing.
The The fears of the Indian outsourcing market being eroded are echoed in the research findings from research firm Gartner Inc which states that unless something is done about rising wages and labor shortages in India, that companies abroad would certainly be shy of outsourcing to India in the future. They cite the example of Ireland to prove that even Ireland lost substantial outsourcing business due to such problems and India was at advantage at that point, but now Ireland will be at the receiving end if these trends continue.
Data Center Outsourcing & India
When we talk about outsourcing we normally mean IT services, business process outsourcing, legal process outsourcing and so forth, but this discussion cannot be complete without discussing the aspects of data center outsourcing as well. Now logically we might think that data centers would be the last thing a company would like to outsource mainly because of confidentiality issues relating to the vital and important data which is stored on the servers of a company.
The main reasons which prompt parent companies to outsource data center services include complexity of business demands in the current technological arena, data growth, staffing issues and so forth. Though currently India only holds about 2% market share of the total data center outsourcing business, it is expected to grow by nearly 22% in the years to come. These data center operations which are given by foreign companies to specific vendors are also known as managed service providers or MSPs. In recent months we have heard of several major players in the market such as IBM and HP developing global data centers for the purpose of managed data center services.
Subscribe to:
Posts (Atom)
