Near-shore sourcing becomes an attractive model for businesses seeking a quick way to capture savings.
by Atul Vashistha
This recession has been a burden to thousands of companies struggling to survive. With sales plunging and revenues and profits dropping faster than ever, this has meant closure for a number of firms. Last year, in particular, was difficult for economies around the world, and the downturn has forced major players to reassess their growth, costs, and profit margins.
As before, during such times, a number of companies have turned their attention to outsourcing in their search for bigger savings. The question now being asked is: What will the impact of this economic downturn have on outsourcing budgets, and how deep will it affect the current outsourcing that most players have in place?
In 2008, neoIT and Goldman Sachs partnered to develop the Global Services Confidence Index (GSCI) to provide an indication of the demand, risks, and opportunities related to globalization and spending patterns. In a survey conducted with 57 C-level respondents, including vice presidents, directors, and global heads of offshoring programs, some salient key points emerged that shed light on the direction and pattern that outsourcing will take during the next couple of months.
Both the big players and emerging contenders are even more keen on the overused phrase, “budget.” Most organizations have kept their nondiscretionary budgets untouched but are closely monitoring their discretionary spending as they experience an increasing pressure on growth and reduction on margins.
And with the big layoffs that 2008 has seen, can one expect to see bigger outsourcing deals? While a lot of companies have been forced to downsize, an equal number are eager to unchain their key executives from routine tasks in order to capitalize on their innate potential by outsourcing standard, yet much needed, requirements. This is an emerging global trend that makes outsourcing seem even more important and dollar efficient. Better resource management, more products at the same cost, efficient customer service at minimum dollar all continue to make outsourcing a viable and profitable option.
New contenders are emerging as companies struggle to balance shrinking budgets with rising outsourcing fees. India for example, has witnessed an increase in costs related to real estate and infrastructure, coupled with salary inflation to the shocking rate of 12 percent to 15 percent, making it less attractive as a destination for cheaper outsourced labor. This has been tempered by the downturn.
Yet, as we enter 2009, outsourcing spend for the next six months is expected to remain the same with none of the gains 2008 saw. As organizations continue to be under pressure to cut costs, a new and significant trend will emerge as companies leverage nearshore destinations such as Latin America and Eastern Europe. Companies seeking to realign their spending will do so more in application development and maintenance and BPO, and infrastructure spending may likely remain at the same level of onsite-offshore spend rate. Manufacturers and tech companies will continue to learn to capitalize on global talent pools to increase products at a rush rate and lower costs.
Organizations have also realized the need to capitalize on the multilingual options that newer emerging geographies offer. Latin America can provide the Spanish and Portuguese support that is much needed as the Hispanic population in the West continues to grow. Similarly, corporations are spending a sizeable amount of their budgets in Eastern Europe as they continue to fulfill the language requirements of European markets. China is vying for position as a dominant contender in the playing field, and one can expect more companies investing in this economy.
In addition, many investors are reaching out to near-shore destinations such as Canada and Mexico as cheaper alternatives that fulfill time-zone and language requirements.
As companies work out the smaller details, they are now looking closely at the outsourcing model and seeking to reap maximum additional benefits such as linguistic flexibility that workers in these countries can offer. Investment in these new regions could free up hundreds of millions in cash flow annually. And smart use of offshoring can step up the performance of current players in the market. In the end however, the ones that emerge winners will eventually be companies that are adept at maximizing the benefits that outsourcing offers while minimizing the risks and costs involved.