Report outlines offshore outsourcing concerns and benefits

In an election year where one of the top issues is the economy and the related loss of jobs to foreign countries, it’s no surprise that the word “outsourcing” has become a dirty word.  Many people have come to equate outsourcing with the transfer of American jobs overseas – especially high wage jobs in the IT sector.  Some legislators are trying to reverse or at least slow the trend in outsourcing with new laws or companies’ loss of tax benefits.  But the fact of the matter is that IT outsourcing – both onshore and offshore – is a key business strategy that is here to stay. 

This fact is outlined in the 2004 Global IT Outsourcing Study conducted by DiamondCluster International, a global management consulting firm.  Whether your company is considering outsourcing some IT functions, or it already does, this report is a “must read” to help you understand the market and the trends.  I’ll summarize some of the key findings here, but you can download a full copy of the report at https://www.diamondcluster.com/

To obtain the data, DiamondCluster interviewed or surveyed 182 buyers of outsourcing services.  All of the respective buyers’ companies were either currently outsourcing at least some IT functions, or plan to in the next year.  In addition, the consulting firm surveyed 209 executives from outsourcing service providers to get another perspective on trends.  The companies interviewed spanned the gamut from midsize to very large.

DiamondCluster conducted a similar survey on outsourcing in 2002, and it’s interesting to see how outsourcing, as a business strategy, has matured.  For example, in 2002, survey respondents cited uncertain financial payback and the quality of the service providers’ work as two of the top risks of outsourcing.  In 2004, the concerns have shifted to ensuring the effectiveness of the investment in outsourcing as well as managing remote resources.  Today, quality is not a big concern, and there are some established models for financial payback a company can expect.

Other risk factors cited by companies wanting to outsource are:  the outcome of legislation or political pressure; backlash from employees as jobs are lost to offshore service providers; negative publicity and harm to the company’s reputation as jobs shift overseas; and, global instability.  A large outsourcing contract can be jeopardized by any of these factors, so DiamondCluster recommends flexible, short-term deals to mitigate some of the risks.

The survey shows that expectations about the benefits of outsourcing are becoming more realistic.  In the 2002 survey, it was common for companies to expect efficiency gains in the range of 50%.  Today, companies anticipate a 10% to 20% gain in efficiency.  What’s more, buyers say the rates they are paying have declined a bit.  That’s interesting, particularly as service providers say their rates have increased.  The report surmises that onshore rates are lowering while offshore rates are increasing, bringing an equilibrium to the market.

Having the perspectives of both buyers and service providers makes this report interesting.  Service providers, especially those offshore, believe that they distinguish themselves with price.  The lowest price, however, is not top of mind for buyers.  More important, they say, are breadth of skills, industry expertise and a prior relationship.  This would seem to give the upper hand to long-established onshore outsource service providers.

Another sign of a maturing market is that buyers report they are getting better at effectively managing the outsourcing relationships.  Buyers use the following metrics to measure their vendor’s performance:  on-time delivery of services; cost effectiveness; end-user satisfaction; timely, quality staffing; and, service availability.  Regular meetings between the buyers and the service providers continually fine-tune expectations and the relationship overall.

One significant conclusion of this report is that offshore outsourcing is on the rise.  In the 2004 study, 86% of the participants expect their use of offshore IT outsourcing to increase in the coming year.  This statistic is up from 32% of respondents in 2002. 

The report concludes:  “Simply put, offshore outsourcing of IT functions has reached the mainstream.  Today, companies will not hesitate to explore sending IT functions overseas to take advantage of highly skilled, cost-effective labor pools in other countries.”  Looks like the politicians better get their rhetoric ready for the fall campaign.

Linda Musthaler is vice president of Currid & Company.  You can write to her at mailto:Linda.Musthaler@currid.com