By Clayton BrowneSome historians argue that Kodak’s 1989 decision to outsource most of their IT operations was the watershed moment for the outsourcing industry, and certainly many other large companies jumped on the outsourcing bandwagon shortly after that. And for the next decade or so the question was not whether to outsource, but what and how much to outsource. But can offshore outsourcing continue to grow year after year at such a sizzling pace?
However, in the 21st century the conversation between business executives and outsourcers has begun to change from “tell me how much I can save” to “tell me how much you can help me grow” and “tell me how you are going to help me improve my products/services.” Accompanying this trend has been a rapid growth in specialty outsourcing that offers companies services in areas such as sales or product development or clinical trials, areas that used to be considered core processes that companies did not outsource.
While the Financial Crisis of 2008 and the resulting recession that many international economies are just now starting to emerge from has dampened growth in some sectors of the outsourcing industry, the reality is that the number of businesses undertaking outsourcing has continued to grow, albeit more slowly, and is almost certain to continue to grow over the next couple of decades.
According to a recent report from the Everest Group, the global outsourcing industry will grow at around a 15% pace in 2012. And although not quite the double-digit growth seen in the late 1990s and early 2000s, the market research firm Gartner projects that global IT spending will increase by around 4% in 2012 despite the ongoing European recession slowing growth. Furthermore, IT spending is likely to increase at a greater rate in 2013 and 2014 as the international economy emerges from the current recessionary environment.
The development of functional partnerships between large businesses and their specialty outsourcing partners is almost inevitable
The term nearshoring has come into vogue in the 21st century to describe the practice of offshore outsourcing in a nearby location (whereas offshoring typically means outsourcing in a relatively far away location). There are a number of advantages to nearshoring, principally revolving around ease of management and collaboration and creating efficiency and flexibility in project management. Latin America has developed into a nearshore hub for US businesses, much as Eastern Europe has for Western Europe and East Asia has for Japan and Korea.
Nearshoring has received even more attention since the economic downturn of 2008 as companies have looked for ways to boost the bottom line with minimal risk. By the same token, continued growth in nearshoring is highly likely as businesses simply can’t ignore the relative benefits versus long-distance offshoring. This is especially true in nearshore outsourcing hotspots like Eastern Europe and East Asia where there is a great deal of high-quality human capital available.
From Non-Core Processes to Core Processes and Functional Partnerships
The original idea behind outsourcing was to have the relatively expensive employees of US and European businesses focusing on work that was important to the company, and to outsource the non-core businesses processes like HR and accounting to others who specialized in those processes. That model of outsourcing has proven to be win-win situation, at least in terms of economics, for both the companies doing the outsourcing and for the outsourcing firms.
By the same token, it is only natural that even further efficiencies emerge over time as the parties involved develop trust and a greater understanding of each others’ needs. In the ideal case a truly synergistic relationshipis created, as highly efficient companies can ultimately produce more products and services at a lower cost.
Brenna Garratt, CEO of The Delve Group who has been involved in the outsourcing industry since the late 1990s, projects that the next decade will see significant growth in the specialty outsourcing industry as companies seek greater efficiencies. She argues that fields such as knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are likely to see robust growth as companies become more and more willing to move core functions to top quality specialized outsourcers.
Garratt also points out that the concept of knowledge management has been around since the 1990s, but the practice of knowledge management is undergoing a revolution in the 21st century. Knowledge management today is not just about sharing lessons learned and improving performance, but about “virtual enterprises” and innovation and integration of various knowledge sets to create a more efficient whole.
Garratt also emphasized that the development of functional partnerships between large businesses and their specialty outsourcing partners is almost inevitable. When you are talking about having another company undertaking some of the core functions of a business (like big pharma companies outsourcing clinical trials and even sales operations today), you are talking about sharing the innermost operating “secrets” of the company, including intellectual property and business models.
R&D outsourcing used to be largely IT and software development, but outsourcing of R&D today is found all across the board from clinical trials to consumer product development. The rapid growth of contract research organizations (CROs) of all types is clear evidence of the strength of this trend, and some analysts project that 60% to 80% of total global commercial R&D will be actually undertaken by CROs within another decade.
Outsourcing and the Cloud
The advent of the cloud and growing adoption of various forms of cloud computing services by businesses has begun to blur the lines between outsourcing IT functions and purchasing software or other technical or infrastructural services. The paradigm change is reaching the point where business execs of companies of almost any size can legitimately ask do I need a dedicated software development team (or accounting or HR department) in-house or in India when I can get virtually all my technical, infrastructural and even human support needs met through the cloud?
Software-as-a-Service (SaaS) was the foundational business model of the cloud, and SaaS offers significant benefits in helping businesses get the right apps on the right desktops at the right price. However, new business models such as Platform-as-a Service (PaaS) and Infrastructure-as-a-Service (IaaS) have been developed in the last couple of years, and analysts project IaaS providers such as Amazon and Rockspace will derive at least $1.5 billion in revenues from these new more inclusive business platform cloud service models in 2012.
This trend toward companies utilizing “off the shelf” business processes is just in its infancy, and the sky is literally the limit as these new business models have the potential to revolutionize not just the IT industry, but the outsourcing industry more generally.
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