No Escape for United States from Global Outsourcing Trend

Don Tennant
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Although outsourcing activity was relatively flat in the United States last year, the advance of outsourcing as a global phenomenon appears to be relentless. The force behind the onward push is Asia in general, and China in particular.


That was my bottom-line takeaway from a newly-released "Global Sourcing Trends" report by international law firm Morrison & Foerster. Here are some highlights from the report in case you want to delve into it and collect your own takeaway:


  • More countries are emerging as outsourcing destinations. IBM has reported that business process outsourcing (BPO) activity in the Philippines exceeded BPO activity in India. This is a sign that outsourcing continues to become more global, migrating to areas where buyers can take advantage of labor arbitrage. Countries like South Africa are making a push into the market by changing laws and granting incentives that will reduce costs for companies seeking to outsource there. Established outsourcing destinations like India are seeking to move up the "sourcing food chain" to retain their piece of the outsourcing market. Outsourcing to China continues to consist mainly of Information Technology Outsourcing, with some increase in the outsourcing of other activities such as R&D and even film animation. BPO has seen remarkable growth in 2010, particularly in the Philippines, but also in Malaysia, Thailand and increasingly Vietnam and Indonesia, all of which are also beginning to enter the ITO market more aggressively.


  • China is eyeing the United States as an outsourcing customer. Last year saw continued growth in outsourcing to Asia as the global economy recovers and companies look to further reduce costs in the wake of the global recession by offshoring to lower-cost countries. Offshoring to China grew further in 2010, boosted by the Chinese government's announcement of generous tax incentives to outsourcing service providers in China's most important cities. The larger Chinese outsourcing service providers are starting to expand their horizons and look overseas, in particular to the United States, to raise capital and seek new customers, markets and talent.


  • Outsourcing was flat in the United States last year. According to TPI, outsourcing activity in the United States showed modest growth through the third quarter of 2010, but that growth was a result of restructurings rather than new deals. Companies seemed to be willing to hire consultants to perform assessments (exhibiting an interest in outsourcing), but were unwilling to move forward with transactions. This seemed to be driven by a lack of confidence in the U.S. economy as forecasts for IT spending during the year were revised to show a spending decrease by companies. In addition, outsourcing took a hit in the United States as a result of high unemployment rates. A number of states introduced legislation banning offshoring, and companies were hesitant to be associated with any outsourcing activity. This became a major point of contention in the mid-term elections. Although the elections are over, the anti-outsourcing sentiment will not likely abate until unemployment rates in the United States recede to historical norms.


  • Outsourcing activity varied widely by vertical sector. Outsourcing by financial institutions bounced back in 2010 in large part because of the restructuring of a number of large IT deals. Activity in the health care and pharmaceutical industries declined from 2009 levels but remained flat as compared with 2008 activity. These sectors, however, look promising for increased activity in 2011. Travel and transportation outsourcing was up in 2010, to some extent because of the adoption of the outsourcing model by hotel chains. Public-sector outsourcing was significantly down in Europe. In the United States, outsourcing by state and local governments was down as a number of troubled state deals were restructured.


  • Legal Process Outsourcing has emerged from obscurity. While LPO has been around for nearly a decade, the rate at which it expanded in 2010 was unprecedented. U.S. companies and even law firms began to adopt LPO as a viable business practice that would reduce expenses. In addition, as the rate of adoption has increased, the kinds of legal work being outsourced have become more sophisticated. It appears that LPO will continue to be a major growth area.


  • The worlds of outsourcing and financial services regulation will become more closely entwined. Capital adequacy requirements for banks and insurance companies imposed through Basel II implementation and forthcoming Solvency II and Basel III requirements will change the outsourcing market. If adopted as market practice, these changes may then spread outside the financial services sector. Most immediately, there will be increased emphasis on counterparty risk and the effect on banks' and insurers' capital, and more interest from regulators in outsourcing service providers.

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