on 05 March 19
The global financial crisis of 2009 set the stage for a number of changes to eventually happen in the world of outsourcing. Up until then the quantum of outsourcing had been increasing at a steady pace. However there were differences from one industry to the next, and between one company and the next, in how much offshore outsourcing was mandated. Banks, in particular, which had historically always been conservative about imbibing and implementing changes in the way they operated and oursourced or offshored their work, varied greatly in their approach. Many were willing to outsource and offshore lower ends of technical or business process work, while some chose only to offshore their work but retain it inhouse in offshore captive centres. Some, like Wells Fargo in the US, chose not to offshore at all.
The outsourcing industry, meanwhile, continued to move from strength to strength in terms of improving delivery excellence and their horizontal capabilities. While they focused on that, they didn’t move up their offerings very far up the value chain in terms of being able to lead outsourced operations into the future from a business domain capability point of view. This was partly due to the fact that they weren’t getting enough exposure to critical core functions, and also because there was inadequate incentive for them to do so, given that a focus on the horizontal service gave them adequate growth.
After 2009, the financial sector was among those that took the biggest write downs in their net wealth. Other industries were affected in a domino effect. All were under pressure to cut costs, and to do it fast. At first there was a temporary lull in the outsourcing market while everyone took stock of what had just happened, and then there was a greater thrust towards increasing outsourcing and offshoring in a bid to reduce costs. For about 2-3 years, what was very visible to the outsource vendors was that their market had increased in terms of scope and volume, but was under very tight pressure in terms of unit pricing.
From 2012 onwards along new and disruptive technologies began to gain a foothold. These were cloud, mobile and digital, with Big Data analytics also evolving with a lag. All of them potentially reduced operational cost and enabled a better closeness to the customer. It’s no surprise that these received enough encouragement and adoption. But even as late as early 2014, it was apparent that cost pressures were continuing, along with additional disruptions, this time to business models themselves. The result was that outsourcing and offshoring continued, and the map of preferred destinations continuously evolving along its own hype cycle-like curves.
Soon it became apparent that many outsourcers just couldn’t adapt fast enough to taking on more and more work, which by now had reached the higher levels of the business function value chain. The result was that although work still had to be done offshore, there was renewed interest in retaining it in-house, within captive centers. The prime motivators for this were to try and further reduce costs by eliminating the outsourcers' margins, and at the same time speeding up the build-up of a much deeper business domain understanding, and possibly even business leadership.
Given this background, a quick summary of what to expect this year in the world of offshored outsourcing would be:
- A continued interest in insourcing to offshore captive centres.
- An increase in the variety of higher value processes being offshored across IT, core business processes, engineering processes, and R&D.
- A continued re-distribution of work among offshore locations, with real estate cost arbitrage, labour cost arbitrage and strategic talent pool availability being the key drivers.
- Continued adoption of the cloud. In a way, this seems like a form of offshoring of computing and storage, enabled by technology.
- A continued thrust by outsourcers to re-strategise their own operating models, and to rethink their service offerings and operational solutions in order to continue to be eligible to compete for a share of the services market.
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