Outsourcing Progress

28 October 2009:

If you thought outsourcing would take a hit from the financial crisis, think again. While certain sectors have seen double digit declines, other end markets are growing. What the final tally for the year might be is unknown, but the results thus far are somewhat counter-intuitive. Outsourcing’s resilience in the face of such financial and political strain – lawmakers across the globe have often required firms to hire or source materials domestically – has implications for globalization. For one, it suggests that globalization as a trend remains in place despite fluctuations. Second, given that many firms plan to expand their outsourcing footprint, one would conclude that the trend should continue. Indeed, that many small and mid-sized companies seek sources of innovation offshore, suggests the trend has considerable strength. Of course, that doesn’t mean there won’t be bumps in the road: the gap in structural costs between US and offshore manufacturing operations has been cut almost in half thanks to rising unemployment, calling into question new uses of outsourcing. Nonetheless, no one has a monopoly on talent or innovation, so firms will continue to look outside of their domestic market for opportunities.

The implosion on Wall Street last year was seen by many as signalling the end of globalisation. De-globalisation became a favourite word to describe the worldwide economic contraction. For the first time since 1982, the volume of global trade actually shrank. Not surprisingly, the outsourcing of services, which had grown dramatically in the past decade, was considered most vulnerable to the global downturn.

The pronouncement of the death of outsourcing, however, seems to have been premature. But a year on from the implosion of Lehman Brothers, the information technology and BPO sectors seem to have absorbed the shock, consolidated themselves, and are seeking to adapt and reinvent. The trend, born of technological innovation and new business models, has not been reversed. It is simply reconfiguring and adapting to a new business climate.

The phenomenal growth of fibre-optic networks and computing has enabled corporations to run their back offices thousands of miles away. Outsourcing business processes, IT maintenance, research, design and auditing has achieved efficiency and savings. The factors that encouraged companies to outsource have not changed, but their financial ability and demand levels have. In fact, their need to tighten spending has provided an added incentive to outsource some work. What has turned negative is the public perception of outsourcing in the developed West. As politically influential and voluble white-collar workers were the most affected by outsourcing of services, corporations have come under pressure to show patriotism in their hiring, and not focus on maximising profit. What could have been ignored as populism has been embraced by politicians and, in some cases, turned into law. For instance, the US stimulus package requires that software needed for medical-services modernisation be produced in the US.