Downturn boosts outsourcing

28 July 2008
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29 July 2008

The challenges of the current economic climate have prompted an increase of outsourcing. But, as Jake Kanter reports, this is not only down to buyers

The troubles in the world economy are at least providing comfort for those in one sector - outsourcing.

In an effort to cut costs, organisations are again looking to find cheaper services all over the world, even at the expense of their own staff.

Figures from sourcing advisory firm TPI point to a 58 per cent jump in EMEA firms' outsourcing activity compared with last year. In addition, Ernst & Young's first outsourcing survey this month revealed 70 per cent of 600 European companies - all with a turnover of at least ?100 million (£78.9 million) - outsource a minimum of one function of their business. Some 49 per cent of the respondents listed cost savings as the top reason for their strategy.

Duncan Aitchison, partner and president of TPI EMEA, explains: "European companies are expressing their concerns regarding the softening business climate by taking steps to reduce operating costs and restructure the nature of their business-support functions."

Rick Simmonds, partner at consultancy Alsbridge agrees outsourcing is growing and current economic volatility is proving to be a major cause. He has observed an increase in firms looking to reduce costs by outsourcing services such as IT, finance and HR.

"We have certainly seen a rise in outsourcing. Staff in countries like India, China and increasingly Brazil have a phenomenal level of education," adds Christian Shawcross, managing consultant at PSD Group. "There is a lot of talent out there and services could cost 10 per cent less than in the UK."

And Martyn Hart, chairman of the National Outsourcing Association, suggests the strategy could provide a good excuse for managers to make redundancies. "Outsourcing has become more respectable. It can be a good way to get costs down - for example most UK mobile phone companies will have call centres offshore because it's cheaper."

But are buyers responsible for this upsurge in interest? Apparently not, according to the latest SM100 poll (News, page 10), where 54 per cent of the respondents believe outsourcing is no more attractive, despite the tight economic climate.

Simmonds suggests this contradiction to the wider trend is because outsourcing is a "natural" cost cutting measure for buyers, who are used to assessing it as an option before approaching suppliers.

"Procurement has been outsourcing for two or three years and it is pretty well informed on the technique."

Nigel Coghlan, global procurement development manager at manufacturing firm Actaris Metering Systems, agrees with the assessment that the move to outsourcing is not being prompted by the economy.

"We are constantly examining our various strategies to see where we can obtain the most benefit."

Other purchasers believe their decisions to outsource or keep "in house" should not change because of the economic climate, with others arguing over the true cost of sending work outside the business.

Shawcross says it gives procurement another tool to drive savings. But Hart contends buyers are more likely to use their knowledge of outsourcing in a more considered way rather than in reaction to a downturn.

But all the experts agree that if an outsourcing initiative is to be a success, it must be in the interest of the entire business. Not, as Tom Woodham, director of consultancy Crimson & Co suggests it might be, an "isolated knee-jerk reaction to rising costs".

SMjul2008

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