Increased Outsourcing of Business Processes

August 9, 2004 by admin

Lean budgets and the growing number of customer-financed projects are forcing more and more IT directors to consider offshore providers. This consideration continues to affect application outsourcing. Until the end of 2003, primarily companies from IT-intensive industries like financial services, telecommunications, or tourism moved some 315,000 jobs overseas. That figure represents one percent of jobs in the affected industries. In a study on offshoring published in May 2004 titled Near-Term Growth Of Offshoring Accelerating, Forrester, an independent technology research firm, surveyed about 100 companies that specialize in business process outsourcing (BPO). The Forrester analysts also surveyed more than 1,800 leading companies in IT and business in the United States, and in India, as well. Decision-makers provided information about which qualifications they had outsourced overseas and how much they had invested in the offshoring process of IT and BPO service providers. The respondents indicated if jobs related to company know-how were to be outsourced abroad and stated how many of the tasks to be outsourced had already been automated.

More and more comprehensive service offerings

Many service and technology providers in the United Sates have not only set up offices in India, China, or the Philippines, but also outsource more and more activities there, such as enhanced IT services or entire business processes. The latter is becoming increasingly important. Here, too, inexpensive but highly qualified Asian personnel are attractive. Even domestic BPO service providers are expanding their offerings to include offshoring. Offshoring has become a BPO requirement.
The leading Indian providers of offshore service have experienced a boom in the last few years and have, of course, expanded their offerings. Now they are attracting customers not only with tailor-made software development and maintenance, but also with BPO services and complete packages that consist of remote implementation, application maintenance, and infrastructure maintenance. They have been able to secure up to 40 percent of the expenditures of American companies for complex IT services.
At most, five percent of the Fortune 1,000 American companies completely exploit the potential of offshoring. In the next 18 months, most additional offshore jobs will be offered by companies that continue to expand their existing offerings bit by bit in the areas of IT and BPO services. This process will continue over several years. On the one hand, potential prospects must prepare to control their IT and business transactions from a distance. On the other hand, trust in responsible dealings with suppliers in business-critical areas must grow.

More jobs from accounting and complaint processing

With the increasing trend toward BPO, outsourcing will affect more and more jobs in accounting and complaint processing. Two factors lead companies to try to do it themselves. First, they hope for short-term savings, but without giving control over to third parties. Second, they do not want to become guinea pigs for external suppliers who are just getting on their feet. But companies will soon have to accept that they operate less cost-efficiently than external providers. That’s why Forrester foresees a wave in sales of proprietary offshore shops in the next few years. For example, GE, an offshore pioneer, is divesting itself of its Indian call center. The buyers will be the offshore service providers who can sufficiently build up their competency by then.
The so-called second wave of outsourcing will involve more and more companies in the areas of electronics and manufacturing. As soon as the controversies about the sense and nonsense of having call centers abroad have sounded, branches like accounting, complaint processing, or credit processing come into consideration. Even the areas of technology in retail, sales and distribution, or processing clinical trials data in the pharmaceutical industry are questioned because of the tremendous pressure on costs.

Services from the Far East and North Africa

The hunt for additional low-cost alternatives to India as an offshoring site has already begun. Those looking for specific language skills like Japanese or French see some potential in other countries. At the same time, IT suppliers in the United States want to better use their available capacities in Brazil or Belarus. In both the short and long term, both trends still lead to less Indian domination of the offshore market. In the study, China, Vietnam, and North Africa appear as possible target regions for offshoring in the future. Economical and qualified personnel could also be recruited soon in other countries, which would decrease dependence upon India. Personnel bottlenecks would no longer be a reason for companies not to exploit their potential for growth completely.

Toothless politics

On the political side, nobody expects any significant stumbling blocks for the expansion of offshoring services. Bills that prohibit offshoring completely will have no chance of being passed in the United States Congress or in individual states. At first, the business lobby was caught flat-footed when Senators John Edwards and John Kerry (among others) took up the topic of offshore services. But the U.S. Chamber of Commerce and the Information Technology Association of America (ITAA) are working with the express goal of postponing the debate and to drown out the calls for regulation. Ultimately, companies willing to outsource will be required to report the number of jobs to be moved offshore and to grant 90 days notice to their employees affected by the move. De facto restrictive proposals for laws, such as those for privacy, will remain in committee, according to the study. Only increased global tension, such as an escalation of the conflict between India and Pakistan, a clouding of Chinese-American relations, or a truly strong legal restraint for data protection can put the breaks on the growth of various BPS areas, such as complaint and credit processing.

Migration underground?

Offshoring will revolutionize the service sector, which has been the number one creator of jobs and the engine of growth in the United States for some 30 years. The future motto will no longer be growth at any price, but increased efficiency. Increased automation and optimization of processes also contribute to this development. The strong growth of offshoring and weak economic growth once again turn the loss of jobs into a political issue. Of course, although no one expects limitations from the political side, the prospect of bad press might drive companies to migrate their offshoring activities underground.
Much like the role Japan played as the catalyst for global improvements in production, India can play this role for the improvements of service processes. Business processes can be optimized within a smaller framework than that used in the 1990s. Companies are better advised to invest only in innovation and in the technological upgrading of their core processes.
For more information see http://www.forrester.com

John McCarthy

John McCarthy

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