IT directors must consider a range of outsourcing options

January 23rd, 2008

rnge of outsourcing optionsMultisourcing will continue its growth in popularity

You know the US credit crunch has started to grind into western European confidence when experts such as Duncan Aitchison, partner at outsourcing advisory specialist TPI, says next year will be sticky and uninspiring.
Aitchison advises users and vendors on a range of external service provision deals.
And he says that after many years of growth ­ particularly in the offshoring market ­ outsourcing is set for a year or two of tough deals and consolidation. IT directors, therefore, need to be prepared for the change in market conditions.

Despite the ongoing transformation, Aitchison says multisourcing will continue to grow in popularity, with users choosing a broad selection of sourcing strategies ­ including offshoring ­ for particular IT and business process needs.

He says that a desire to take advantage of multiple geographies with a range of IT skills and technical advantages will become endemic through Western business.

Across the globe, the percentage of contracts with an element of offshore delivery continues to increase, according to the latest figures from TPI.

As much as 59 per cent of outsourcing deals involve an element of offshoring, up from an average of 43 per cent during the previous four years.

Some firms have been quicker to join the movement than others and public sector organisations in the UK and the US have been reluctant to sign up with offshoring providers.

Financial services companies and users requiring a large amount of back-office data processing have also shied away from overseas contracts.

Such reluctance is often associated with issues of regulation and compliance, says Aitchison, with certain organisations hesitant ­ or even unable ­ to look beyond the confines of domestic providers.

Organisations are often concerned about the potential for intellectual property leakage, and are apprehensive about data leaving the perceived safe confines of the UK.

“There tends to be a greater degree of comfort if it is inside the tent,” says Aitchison.

But he issues a word of warning to technology leaders who are too trusting of domestic employees.

“Companies can put in place as much security as they want, but in the end your weakest point is your people,” says Aitchison.

He expects hesitancy surrounding offshoring to subside because of an increasing requirement to source specialist workers.

The ability to tap into a broad skills pool at a financially attractive price means more UK firms will look overseas for external service provision.

“Cost is clearly significant,” says Aitchison. “But do not underestimate the skills issue. We generally do not have enough skilled talent in the West any more.”

Demand for traditional, bulk IT skills is depressed locally. And Aitchison advises IT professionals to migrate towards process-oriented specialities, rather than heavy-lifting skills.

“These days you have to be able to drive and manage projects ­ and these are skills that firms are much less likely to outsource,” he says.

The requirement for cheap, high-quality technology staff means that demand for external service provision remains high, with more countries eager to join an increasingly globalised market.

“I receive calls from all over the world,” says Aitchison. “Everyone across the world is looking at offshoring.”

And from his recent dealings, Aitchison lists a collection of countries keen to join the offshoring bandwagon: Argentina, Uruguay, the Philippines, Russia, Ghana, South Africa and Mauritius.

Despite such interest, he says India stills wins in every offshoring dimension ­ probably because of the high level of English skills.

So far this year, Indian-based service providers have won more than 24 per cent of all the deals on which TPI has advised, up from an average of 13 per cent during the previous four years.

Asia-Pacific, meanwhile, has represented 16 per cent of all major contracts in 2007, up from an average of about nine per cent across the previous two years.

The region has also seen a 72 per cent rise in its share of the value of new contracts, compared with the first nine months of 2006.

However, Aitchison issues a word of warning and suggests that current market growth is probably unsustainable.

Recent findings from TPI show that in terms of total contract value ­including new deals and the re-tendering of existing contracts the global outsourcing market has experienced a slowdown in growth since this time last year.

The total value of outsourcing contracts awarded in 2007 is down 17 per cent year on year, representing the smallest total for the first three quarters since 2001.

With an aggregate value of contracts of $38.2bn (£18.8bn), compared with $46bn (£22.6bn) during the same period last year, Aitchison says larger providers will look for a bigger slice through acquisitive growth.

Signs of consolidation in the outsourcing industry are already appearing, with venture capital firms looking to invest cash in the Western market and Indian providers such as TCS, Infosys and Wipro becoming serious global players.

“By 2010, the outsourcing market will look very different to how it is today,” he says.


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Entry Filed under: Why Outsource?