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.
This was first published in August 2008