The continuing global economic downturn presents UK companies
with a growing challenge to cut internal fixed costs and maximise
profits, writes Nick Holland, a partner in international law firm
Eversheds. An obvious solution is to
outsource IT functions as well as other business processes.
Analyst Gartner has predicted that spending on IT services will
rise by 9.5% in 2008 and continue to rise steadily in 2009. A
recent report in Computer Weekly supports this view, reporting
that IT supplier profit warnings are down by almost 50% in the
second three months of this year compared with the first three
months. And according to Everest Research, European companies have
entered into more than one-third of all
outsourcing deals during the first quarter of 2008.
Against this background, the outsourcing community is also
seeking to take advantage of, and maximise, the benefits to
business of outsourcing during the credit crunch. The
International
Association of Outsourcing Professionals held a meeting in
London in July to consider the impact of the credit crunch on
outsourcing in an attempt to bring the UK and European outsourcing
industry up to date with trends in the industry.
Current trends in outsourcing suggest purchasers continue to
outsource in a downturn, and in doing so seek ever more
value-orientated contracts.
For example, offshore delivery centres such as India and Russia,
as opposed to UK-based outsourcing providers, are becoming
increasingly attractive because they remove the need to transfer
staff, in addition to the obvious cost savings they represent.
Other players are emerging to compete with traditional
offshore outsourcing markets in India, such as Egypt. In fact,
Egyptian government body the Information Technology Industry
Development Agency claims the costs to do business with an Egyptian
service provider are 10% lower than with an Indian provider.
Multi-sourcing - the simultaneous use of a number of suppliers
by one buyer to support one business function - brings an
opportunity to drive discounts during a multi-bidder procurement
phase and increase competitiveness across suppliers beyond contract
signature, although this does present governance and integration
challenges.
In addition, the ability to scale up and down the quantity of
services being received offers flexibility, which an otherwise
fixed internal business function would not normally permit.
But because we are in a downturn rather than a full-blown
recession, the full effects will not be felt for some time and
although, at this time, outsourcing represents an opportunity to
make savings, businesses should be wary of treating outsourcing as
merely a cost-cutting exercise. Outsourcing deals that focus on
discounted pricing and fail to carefully consider all requirements
of the business as regards the function that is being outsourced
may compromise quality of service and innovation in the long run
and prevent the added value to the business that drives the need to
outsource in the first place.
Vendor and customer alike should take the economic downturn as
an opportunity to do business with more rigour.