The economic downturn is affecting the majority of global markets around the world. However, studies, interviews and surveys conducted in the sector, point to an optimistic outcome for outsourcing and offshoring services in the coming years. This article reviews the key financial, public and commercial sectors and explores the best options available to them.
Today, approximately 30% of revenuesof offshore outsourcing companies are tied to the financial services industry. We are all aware that banks and other financial services firms are under significant pressure to reduce cost. Despite the recent near-nationalisation of several well known high street banks, it is believed that these organisations will most likely only achieve the required cost savings through a reduction in headcount and transferring jobs offshore in 12-18 months. The political pressure to save jobs will be overlooked in favour of reducing costs. This view is reinforced by a recent study conducted by The Everest Research Institute, which predicts Business Process Outsourcing (BPO) from the financial services industry will increase 40 to 45 times the current market size over the next five years, with key drivers of growth coming from cost reductions. We believe that the financial crisis will in fact accelerate global outsourcing.
Public services in 2009 is facing a tough time as unemployment increases, more people will claim benefits. Council tax rates have been frozen for the first time in many London boroughs. In addition to more money going out and less money coming in, the public sector is likely to face huge political pressure to keep jobs in the UK. So where does that leave Outsourcing? Outsourcing in public services has become more widely acceptable but will not generate the savings that offshoring provides and that some would agree the public sector needs. With regards to offshoring there has been little progress beyond the NHS agreement with Steria. We do however foresee a need for this to change. In the future the public sector will retain some jobs in the UK (to ease political views) however back office transactional roles will move to offshore locations to achieve the required costs savings
Commerce and Industry is an area that has always been more progressive and forward thinking as cost is the bottom line and shareholders welcome the financial benefits. Most FTSE 100 companies have already some operations overseas. We predict 2009 will see offshoring in this market grow as companies use this strategy to cut costs and position them selves in a better position within their sector.
What are the best options?
So where are these deals going to take place? Currently, offshoring is the best option for an outsourcing strategy, rather than near-shoring. Service Providers are locating and even re-locating their operations to the cheapest possible location where their operations can be carried out and where the service agreements can be met. India, Philippines and China remain the best rated locations and all offer quite different value propositions and in many ways compete for different aspects within the outsourcing services:
India established in back office transactional work and increasingly competing for specialised skills, It’s the most developed and experienced outsourcing community. Even with the wage inflation India is suffering, survey conducted by OPI2 on the current state of the outsourcing market, not only places India as the first choice for Offshoring location but shows that 20% of the respondents still prefer this location because of their labour cost. Philippines competes for customers requiring language skill sets (e.g. Customer Service). Philippines’ attractiveness for BPO services tends to continue to grow, with a focus mainly on voice based BPO services. Philippines still does not have the education levels and access to university degree skills as easily as India and the time zone different can represent a drawback for UK based operations. China competes for general back office, lower skilled BPO and those not needing significant English language interactions. The market sees China as the favourite location in terms of low labour costs but it’s important to consider it in terms of likely future Inflation wages and currency fluctuation. Wages and salary inflation tends to continue to rise due to lack of English speakers with high level skills and experience in IT and BPO services in the local market. In addition to this, the strengthened tendency of the Yuan continues to grow and has increased over 50% against the pound in 2008.
Where next?
Despite the growth predicted for 2009 in this sector, these well known outsourcing locations are not necessarily going to win business easily. They should expect to face greater competition from other emerging countries that are highly ranked in the sector, such as Egypt, Ukraine and other nearshoring locations.
Egypt It is early days for this new location and there is not yet a significant trend of companies here, however it’s a location that is still developing and has lots of potential. It can offer a variety of language skills (such as Spanish, French, English and Arabic) and all the recent investments in infrastructure, in labour pool, innovation incentives and tax benefits the government is supporting, it looks like a promising location for the near future. Ukraine is becoming one of the best outsourcing hubs in Eastern Europe due to its combination of large talent pool and various value-added factors. Also with acquisition of local companies by BPO providers, like acquisition of Alvion by SoftServe in 2008, and the huge support the government is providing, Ukraine is most likely to have huge growth in the coming years. Ukraine’s currency has depreciated against the Pound, US Dollar and Euro, making it even more attractive to many suppliers around the globe. However, Ukraine faced big wage inflation in 2008 (23%) and it is predicted to have a 17% in 2009. Poland a well known popular location that should not be overlooked. The recent high devaluation of the Zloty against the Pound, even greater than its wage inflation, has made it an even cheaper location for UK companies compared to 2008. However, even with the depreciation of the Zloty, service providers are seeing the turnover has decreased significantly and this is mainly because the market is not growing as it was in the past years. Also, the joining of additional countries, like Poland, to the European Union is raising challenges for near-shoring locations, since its labour force are now able to move freely through Europe causing college graduates to leave the country to find better paid jobs in other EU countries. This will not only impacts on the availability of skilled labour but also on the future wages.
In conclusion, 2009 is going to be for many companies an economical challenge due to the Global crisis, but there is a possible solution by looking to Offshoring options as a way to reduce cost, improve their operational model and to get a better position on their local sector. This clearly will open new opportunities for Offshoring providers and locations to increase their services for worldwide clients around the globe.
