So what’s the future for outsourcing?
Are businesses turning to outsourcing to help them through the economic crisis?
By Paul Morrison
The boom in outsourcing predicted at the start of the economic downturn in 2008 never materialised. So are businesses now turning to outsourcing to help them through the crisis, asks Paul Morrison.
When it comes to the world economy, we live in interesting times. And as businesses grapple with uncertainty, volatility, austerity, the Eurozone crisis and markets in recession, what role if any does outsourcing play?
In particular, has it become a more or less important feature of the business landscape, and is it helping or hindering organisations to succeed?
Outsourcing offers two primary benefits for an organisation weathering the economic storm.
First, cost reduction. Whether it’s shaving 15 per cent off the costs of hosting a datacentre with a specialist, or 30 per cent for offshoring a back-office process, cost reduction is almost always the strongest motivation for outsourcing.
The dramatic fall in new outsourcing contracts between 2008 and 2010 had nothing to do with a perceived growth in insourcing
Properly planned and executed, the vast weight of outsourcing experience is that significant savings can be achieved, and in a time of economic downturn and uncertainty, you would expect these benefits to be highly valued.
Secondly, outsourcing offers flexibility. A well-constructed outsourcing contract can pass the risk of fluctuating business volumes onto a supplier.
So, for example, instead of paying for an HR organisation scaled up to support a rapidly-growing business, your organisation could pay an outsourcer on a transactional basis – for example, per recruit or per training session – thus flexing your demand for services according to the real requirements of the business.
In an age of cloud and on-demand provisioning, the right outsourcing relationship can encapsulate flexibility and responsiveness.
So outsourcing, its supporters claim, should enable organisations to save money and become more responsive to fluctuations in demand, surely ideal outcomes for businesses under duress.
Back in 2008 and the first onset of the economic downturn, many commentators forecast an outsourcing boom like no other.
The boom never materialised. In fact the immediate reaction of most businesses was to shun rather than adopt major new outsourcing activities. There was no great rush to cancel existing contracts – the benefits for almost all have proven too great.
But in the period between 2008 and 2010 the number of new outsourcing contracts was dramatically lower both for IT and business process outsourcing, down some 30 per cent to 40 per cent from peak levels.
Instead, companies focused on optimising their existing contracts, benchmarking prices and renegotiating commercial terms. But for the most part businesses were not turning to outsourcing to solve or salve their credit-crunch problems.
This trend was nothing to do with a perceived shift to insourcing, the taking work back in-house from outsourcers.
The few significant occurrences of insourcing in recent years, ardently seized on by outsourcing’s critics, are invariably the product of poor strategy, where the wrong processes have been outsourced, or poor execution where outsourcing has taken place without the right know-how – not because outsourcing no longer makes sense.
The reality was that in this time of great uncertainty two factors were impeding outsourcing. First, although it still offered a route to significant cost reduction, these savings were always contingent on up-front investment.
Most outsourcing deals require two or more years to pay back on the costs of disruption and transition. In other words, to save money, businesses first needed to spend money.
With cash in short supply or being hoarded by risk-averse boards and with the focus on the immediate future, outsourcing programmes were not the short-term fix that businesses were looking for.
Secondly, many business leaders simply had bigger problems to think about. Ultimately, outsourcing is a strategy for operational improvement. With markets and companies in crisis mode, at a time of existential challenge, long-term operational improvements were not top of the agenda in 2009, 2010 and 2011. More urgent or more radical strategies took up much C-Level attention during this period.
So, unexpectedly, the economic downturn held back, rather than boosted, outsourcing programmes in the first few years of the downturn.
By forcing businesses to preserve their short-term cash, and focus attention on crisis management, many decisions about whether to invest in a new outsourcing relationship were deferred or dropped.
But the story does not end there. Today the UK and many European economies flirt with recession or are already in recession. The Eurozone crisis is unresolved and threatens disaster in the near future.
But paradoxically, rather than once more postponing long-term plans, businesses are being driven towards further outsourcing by this continued economic uncertainty.
Surge in outsourcing activity
The evidence is clear. The past 12 months have seen a surge in outsourcing activity, with deals in many sectors back to pre-2008 levels. Something has changed in boardrooms across Europe.
The difference is one of broadening horizons. With a future outlook so uniformly bleak, many organisations are starting to see economic uncertainty as a permanent fixture, an ongoing feature of business life.
Rather than waiting for conditions to improve, businesses are making plans for a future of uncertainty and diminished expectations.
In this context, the factors that previously have held back outsourcing – a two- or three-year payback, or management focused on crisis management – are no longer persuasive. It no longer makes sense to wait to invest in outsourcing relationships.
Despite the economic gloom, businesses are turning once more to outsourcing to improve their businesses. Outsourcing is back on the agenda in 2012.