Why outsourcing is no longer about cost-cutting

As outsourcing become less about cost-cutting, the focus turns to improving companies’ access to talent, and agility of product and service offering.

Outsourcing is estimated to be a global market place worth over $600 billion per annum. It now encompasses almost every facet of services, supply chain and manufacturing.

But priorities are changing and the increasing prevalence for near-shoring or on-shoring is driving new trends across many outsourcing projects.

Changing business drivers

Cost savings are no longer the primary reason for outsourcing. Four fifths (80%) of customers outsource to improve business performance and their overall operating model, according to the Duke University research with International Association of Outsourcing Professionals (IAOP). 

The value of outsourcing is now measured less by costs saved and more by how it can help enable strategic growth, through rapid access to talent, increased agility and improved quality of service delivery. 

The following drivers are increasingly central to the decision to outsource:

1. Agility

The ability to respond quickly to new customer requirements, new market opportunities and changing market conditions. Accessing a wider pool of external resources and talent enables companies to flex-resource up and down with demand.

2. Investment

It is often more effective to leverage a service provider’s investment in best practice tools, systems, processes and talent, than to invest in and develop less effective in-house versions.

3. Speed

Outsourcing can fast track a step change in capability.

Closer to home

‘Near-shoring’ accelerates in higher-cost, high-talent labor markets as outsourcing moves into more strategic vs transactional activities. 

Take IT as an example. The shift away from the belief that “cheaper is better” is already taking root in the US and other developed economies for which quality is again the crucial differentiator. 

The US is seen as the world’s most desirable region to expand IT, shows an IAOP research survey, with more service delivery centers being added over the next two years. As many routine IT tasks become automated, the global labor pool for IT outsourcing will continue to shrink, and the demand for more highly skilled individuals will rise.

This further diminishes the prospect of outsourcing these tasks to significantly lower cost labor markets. IT outsourcing contracts actually dropped a full 20% from 2011 to 2012. And a recent Gartner report forecasts that outsourcing of IT services overseas dropping by at least 15% through to 2016. 

As overseas outsourcing drops, near-shoring and in-sourcing (i.e. locating the outsource service provider within the client premises) is becoming more prevalent. Companies are preferring a more customized solution for their strategic projects, with the added benefits that they are better integrated into their organization’s culture and better aligned with the customer service proposition.

In the financial services sector, organizations are actively marketing on-shoring as a deliberate strategy to positively differentiate their customer service offering.

As such, companies are now seeking near-shore outsourced solutions where costs may be contained, but where high quality talent can be found, and where fewer logistical, cultural and language barriers exist.

War for talent

Client companies are increasingly in direct competition with outsourcing providers for skilled talent, but struggle to offer the same flexible working arrangements and career development challenges desired.  

As full-time positions in client organizations become less secure, more stressful and offer less development opportunities, talent is increasingly attracted to the outsourcing service providers. 

The trend is amplified as outsourced work moves away from the non-strategic, transactional space into higher value, strategic tasks, and requiring people with highly specialized skills. This can make it difficult for some organizations to fill critical roles on a permanent full time basis, particularly for roles requiring those specialist technical skills that are already in high demand.

Outsourcing whole functions 

Outsourcing has steadily assimilated more complex, strategic functions – and many that provide expertise by industry, process, regulatory oversight, or job function. Last year, the BPO market alone grew by 12%. 

Within the US outsourced services, both new and renewal, total some $1 billion annually. An HfS survey has anticipated the BPO services market to grow at a 6% compound annual growth rate up to 2017. 

Financial/accounting and HR outsourcing were the two fastest growing areas as existing clients expanded scope and services. The Procurement and CRM markets are also expected to grow strongly, as clients look to accelerate cost-base transformation and access more value-added services around social media and business analytics. The survey also showed:

Outsourcing and mid-size companies

As the BPO market has matured and the service delivery models developed, smaller organizations can now often gain more from outsourcing than larger ones. 

Their business driver is primarily not around economy of scale, but instead they are seeking to rapidly “import” functional expertise from a network of best in class service providers. 

For some, the speed, cost and uncertainty of achieving functional excellence alone is too high and is encumbered with too much risk of failure. Buying in the relevant services has a higher likelihood of rapid coaching, without the challenges of competing for specialist talent, and the use of precious investment capital that might otherwise be spent on core growth projects.

More than two thirds (73%) of mid-size companies report plans to expand existing offshore business processes over the next 18–36 months, according to a survey of 277 outsourcers by HfS and the London School of Economics. It was only 55% the year before.  

But just 41% of larger companies are planning to expand their offshoring of business processes in the same period, down from 52% in the previous year. 

It also appears smaller organizations can find the outsourcing journey more useful and effective. 63% of mid-market buyers said their outsourcing initiatives had been very successful at cost reduction. This compares to only 44% of large companies.