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Six Key Trends in Outsourcing

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  • 1. Six key trends in outsourcingDominic J. Asta

2. Outsourcing has never been the same as offshoring, yet it seems the two concepts have become increasingly interchangeable over the past decade. /02 Despite the long history of outsourcers as leaders in innovation and in delivering practical workforce management solutions, offshoring has increasingly stolen the spotlight and thunder (and not always in positive ways). 3. Offshoring continues to be seen by some as a necessary evil. Yet, our ongoing partnerships and candid conversations with leading organizations and corporate clients around the world are showing encouraging signs that the outsourcing conversation is maturing. Instead of a choice between expensive local consultants and cheaper offshore labor, it has become apparent we need more than just these two operational models to run the businesses of tomorrow. Outsourcing, in all its forms, is rapidly reshaping work as we know it, and at the same time, the economies of both developed and emerging nations. Introduction /03 Hereareourtopsixtrendsinoutsourcingfor2013/14. Wehopeyoujointheconversation. 4. /04 80% of customers today have been outsourcing for more than 10 years IAOP survey 5. primarily about cost /05 Its no longer 01 6. Entire economies have been built on the outsourcing wave, and by all measures, the quality and efficiency of such services have greatly improved. It is now clear that emerging nations have cornered the market for low-cost, scalable capabilities in some business-critical areas. As a result, many businesses are now forced to justify why they are not outsourcing at least some aspects of their business processes, instead of defending why they are. Keeping some capabilities within high- cost, developed economies can now appear like the less innovative and even less logical option. Outsourcing has become, for all large organizations, part of doing business. However, cost-savings are no longer the primary reason for organizationslarge and smallto consider outsourcing. Often ahead of price, these three issues are central to the decision to outsource, and sometimes to offshore: 1. Competitive agility: the ability to respond quickly to new contractual needs, new opportunities and changing market conditions. 2.Scalability: the need to better manage unforeseen and seasonal demand and access just-in-time talent. Its no longer primarily about cost /06 7. 3.Innovation: investment in critical research and development, and the ability to access high-demand, low-supply talent in order to deliver innovative products and services in a timely way. Those organizations that have moved some of their business processes offshore say they are more flexible and agile, and [are] better able to adapt to competition in challenging economic environments1 . A recent International Association of Outsourcing Professionals (IAOP) survey also demonstrated that 80% of customers outsource to improve business performance and their overall operating modelprice is not the primary factor even if it is an ancillary benefit. The other key reason that offshoring efforts are no longer primarily focused on cost- savings is simply that it is not always cheaper to offshore, hence trend number two. Its no longer primarily about cost /07 1 http://www.fuqua.duke.edu/news_events/news-releases/offshoring-jan-2012/#.UdpHoM0ZSZM 80% of customers outsource to improve business performance and their overall operating model price is not the primary factor even if it is an ancillary benefit. 8. /08 02 Near- shoringis becoming more prevalent 9. Near-shoring is gathering pace within higher cost, high-talent labor markets as outsourcing moves into strategic activities. The shift away from the belief that cheaper is better is already taking root in the United States and other developed economies for which quality is again the crucial differentiator. In fact, an HfS Research survey shows that the US is currently seen as the worlds most desirable region to expand IT, with more service delivery centers being added over the next two years. As many routine IT tasks becomes automated, and the incremental benefits from labor arbitrage are diminishing, the global labor pool for IT outsourcing will continue to shrink. As the talent pool becomes smaller and more expensive, and routine tasks are undertaken by machines instead of people, the demand for more highly skilled individuals rises. This further diminishes the prospect of outsourcing these tasks to significantly lower-cost labor markets. In fact, IT outsourcing contracts dropped a full 20% from 2011 to 2012, and a recent Gartner report says that the combination of these factors will result in outsourcing of IT services overseas dropping by at least 15% through to 2016. Near-shoring is becoming more prevalent /09 IT outsourcing contracts dropped a full 20% from 2011 to 2012 and outsourcing of IT services overseas may drop by at least 15% through to 2016. 2012 2011 20% reduction 10. Over time, clients have become acutely aware that customers in developed economies may desire lower prices, but they will rarely accept lower standards of service along with it. A better compromise in some instances is to near-shore to hubs of specific talent and expertise. As such, companies are now seeking near-shore outsourced solutions where costs may be contained, but where high-quality talent can be found, and where fewer logistical, cultural and language barriers exist. For the US, options in Central and South America, Mexico and Canada will continue to be attractive business process outsourcing destinations into the near future, particularly as rankings around labor productivity growth, infrastructure spending, post-secondary education enrollment, and broadband access dramatically improve in developing Central and South American countries. Alongside this, employers seem to be indicating that more centralized control of capital with improved touchpoints is what they are seeking. Insourcing and near-shoring of projects or programs, especially for more strategic work, allow for more customized solutions that better integrate into an organizations culture and provide the transparency they desire. Near-shoring is becoming more prevalent /10 11. /11 applied by function Outsourcing is increasingly 03 12. /12 Efficiencies found in early applications of outsourcing have also transferred to lower-volume, higher-touch functions. Outsourcing has steadily assimilated more and more complex, strategic functionsand many that provide expertise by industry, process, regulatory oversight, or job function. Today, outsourcing solutions are often customized by industry or organizational vertical, e.g. FAO, CRO, RPO, CWO, and HRO. Last year, the BPO market alone grew by 12%. Within the US, outsourced services, both new and renewal, total some $1bn annually. And, an HfS survey has anticipated the BPO services market to grow at 5.1% in 2013, and 6.0% CAGR to 2017. Financial/accounting and HR outsourcing were the two fastest growing areas, as existing clients expanded scope and services. The CRM market is expected to grow more rapidly in 2014 as clients buy more value-added services around social media and analytics. OUTSOURCING IS INCREASINGLY applied by function 76% reported to currently outsource some aspect of IT; 81% predict future IT outsourcing. 30% currently outsource HR functions, and 46% predict outsourcing in the future. 37% reported currently outsourcing accounting/ finance space and 53% expect to do so in the future. In a 2012 survey by Deloitte, of those companies that use outsourcing: 13. /13 The general value proposition of outsourced models has evolved steadily to apply to more strategic functions, and both hard and soft savings can be realized in these more complex areas. If business process outsourcing is to successfully make the transition from only non-core and non-strategic functions to include strategic ones, it requires a different operating methodology that incorporates more of a partnership with the client organizations. From tighter integration, clients will have better transparency to influence outcomes. This insight and collaboration should help to drive more seamless service, improved business continuity, and better on-going communications in outsourced workforce solutions. OUTSOURCING IS INCREASINGLY applied by function Seefollowingdiagram 14. /14 Business processes and deliverables OUTSOURCED OUTSOURCED INTERNAL INTERNAL non-core/ non-strategic non-core/non-strategic non-core/strategic PRESENT DAYHISTORICAL core/strategic core/strategic 15. /15 Outsourcing is expandingamong mid-sized operators 04 16. /16 Smaller organizations may stand to gain more from outsourcing than larger ones. Some 73% of mid-size companies report plans to expand existing offshore business processes over the next 1836 months, compared to 55% of respondents to the same question a year earlier. Conversely, just 41% of larger companies are planning to expand their offshoring of business processes in the same period, down from 52% in the previous year. And, it appears smaller organizations can find the outsourcing journey more useful and effective. According to a survey of 277 outsourcers by analyst firm HfS Research and the London School of Economics, 63% of mid-market buyers said their outsourcing initiatives had been very successful at reducing costs. This compares to 44% of large companies. In addition, the following points were revealed: Some 42% of mid-market buyers said their deals were very effective in meeting compliance and regulatory requirements, compared with 30% of large companies; and 33% said outsourcing had given them more effective global operations, compared to 18% of large companies.2 Outsourcing is expanding among mid-sized operators 2 http://www.cio.com/article/689037/IT_Outsourcing_What_Big_Companies_Can_Learn_from_Midsize_Companie

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