News Analysis

Businesses spread offshoring risk

Karl Flinders

Businesses are continuing to offshore IT during the recession but they are spreading the risk by engaging with suppliers in more locations.

Traditionally, India has dominated the offshore IT industry, but businesses are increasingly looking further afield.

Multi-sourcing, whereby businesses form relationships with a large number of suppliers for small chunks of business, is a growing trend. Increasingly, firms are hedging their bets by choosing suppliers in multiple locations.

Professor Leslie Willcocks of the London School of Economics' (LSE) outsourcing unit likens the process to spread betting. If one location fails to deliver you can transfer IT work to another.

Alternative offshoring locations

But without the emergence of new offshore locations and readily available information about their pros and cons, IT departments have limited options.

Earlier this month, LSE published a report entitled Beyond Brazil, Russia, India and China (Bric), which revealed that businesses looking to offshore IT have a wider choice of possible locations than they might think. He says it is the first detailed study of alternative offshoring destinations.

The Beyond Bric research, commissioned by the Egypt Information Technology Industry Development Agency, analysed the strengths and weaknesses of 14 emerging offshore destinations.

Non-Bric locations studied 
Belarus
Bulgaria
Costa Rica
Czech Republic
Egypt
Mexico
Morocco
Philippines
Poland
Romania
Slovakia
Tunisia
Venezuela
Vietnam

The study looked at the performance of all the non-Bric countries for cost, skills, environment, infrastructure, risk and market potential (see box).

Willcocks says India will dominate offshoring for the next 20 years, but predicts that other locations will win business from IT departments.

He says India has the problem of high staff attrition rates and is using non-Bric countries to support it on some deals. China has language and cultural obstacles to overcome. Brazil and Russia are huge offshore locations but have so far failed to reach their potential.

The six factors analysed 
 
  1. Cost: labour costs, infrastructure costs, corporate taxes
  2. Skills: size of skills pool, size of local IT sector
  3. Environment: government support, business environment, living environment, accessibility
  4. Infrastructure: telecoms and IT, real estate, transportation, power
  5. Risk: security, disruptive events, regulatory issues, macro-economic risks, intellectual property risks
  6. Market potential: future attractiveness as an offshore locationa

Innovation over cost

Non-Bric countries could take advantage of the recession by differentiating themselves through innovation rather than competing on cost alone. "Rather than going down the lowest cost route companies are asking for more innovation. This is an unexpected effect of the recession," says Willcocks.

Innovation and reduced costs do not have to be mutually exclusive. "The suppliers have improved their capabilities over the past four or five years," he says.

Businesses are looking for innovation from outside the UK because there is a major skills shortage, says Willcocks. By 2010, there will be a shortage of 714,000 people with IT skills in the UK.

Multi-sourcing is a growing trend as businesses attempt to reduce risks. Multi-shoring, in which suppliers offshore their IT and business servicesto a variety of offshore centres, is also likely to take off.


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