Offshoring, Outsourcing Slows; Companies Refocus

MBA (3/12/2008 ) Palaparty, Vijay
Labor markets worldwide such as in India have experienced deceleration this year in offshore outsourcing services because of a slowdown in the global economy, says Miami-based global strategic advisory firm The Hackett Group.
The company said that although opportunities exist for continued growth in India, because of struggles to reduce costs in North American, European and several industrial Asian markets, some companies are "hitting the pause switch" for the moment.

“Many companies will switch their attention to operational and financing challenges, often resorting to simplistic solutions that are not sustainable and may in fact weaken competitive positioning,” said Julio Ramirez, globalization and outsourcing practice leader at Hackett. “A number of [offshore outsourcing service] providers are already seeing evidence of certain projects intentionally being deferred until the market uncertainty subsides.”

In weak economic times, companies tend to make cuts without a focus on improving sustainable performance, regardless of a need to drive effectiveness in areas of information technology, human resources, procurement and other selling, general and administrative areas, Ramirez said. “Companies have a tendency to implement hiring freezes, layoffs and they may close facilities—the across-the-board reduction is often non-sustainable and could hurt competitive edge after recovery,” he said.

But companies that already have an investment in outsourcing will aggressively pursue expansion—a mixed message, Ramirez said. “Financial services companies such as New York-based Citibank, Charlotte, N.C.-based Bank of America and Wachovia—companies that already have a captive or BPO [third-party business process outsourcing provider]—are stepping up to further the process and are expanding to higher-value processes,” he said. “They have incentive because they have seen results from the less risky processes and they see benefits in expanding more.”

The slowdown is common among companies—most prevalent among financial services, housing, mortgage banking and construction companies—that have made initial investment in research of the offshore outsourcing landscape and have reached the point of signing a contract but are delaying its execution, Ramirez said. “Companies that have not yet done a pilot or committed to a project to look at outsourcing or offshoring will have the greatest tendency to freeze projects,” he said.

“We’re seeing a worsening of the economic situation but we are not in a recession yet, and if the first quarter ends up yielding negative growth, it could mean that we are headed toward a recession,” Ramirez said. “We’re beginning to see some tell-tale signs of pausing and slowing down. The last recession was around 2000 and 2001, and the lessons learned then may not carry through because outsourcing was at its infancy then. For those companies that already have a presence of a captive or BPO that is working well—they have an advantage and incentive to push more work and use it for cost-reductions at present."

Ramierez said companies that have not yet implemented BPO face challenges. "All of it requires a lot of upfront cash expenditure—evaluation, looking at the community, negotiating, archiving and in some cases it requires investors," he said. "Revenues are certainly being put on hold and when revenues are hit, one of the first responses is to freeze all projects, regardless of their strategic value. Many companies will choose other tactical moves that provide paybacks over the next 12 to18 months.”

Interest in offshoring is high and companies that have already made an investment will continue to move forward with projects that combine globalization and strategic process transformation, Ramirez said. “Companies focus their efforts on rapidly driving higher efficiency in back office processes, freeing up excess working capital, and enhancing their enterprise performance management systems and processes. These companies will use the economic slowdown to accelerate their outsourcing initiatives, increase the scope of existing contracts or in the case of in-sourcing, push more work to their offshore captives,” he said.