What's behind a growth in outsourcing in the manufacturing sector?

Debra Maxwell, managing director of business process outsourcing at arvato UKDuring the first half of 2014, the UK manufacturing sector spent £130 million on business and IT outsourcing, a 132 per cent increase on the same period in 2013.

The number of contracts originating from the sector was also up 50 per cent year-on-year. These figures, taken from our quarterly Outsourcing Index, are surprising given that manufacturing is not seen as a traditional market for business process and IT outsourcing. This fact perhaps explains why 66 per cent of deals in the first half of the year were first time outsourcing agreements.

So what’s behind this growth? In my view there are a couple of factors driving it.

The first is that the traditional assumption that outsourcing is purely a cost-cutting strategy no longer applies across the board.

Evidence suggests more businesses are turning to business process outsourcing to free up resources to concentrate on growth opportunities. We saw this trend emerging in independent research we commissioned with 100 UK BPO customers, which found two-thirds had outsourced as a means to enabling some form of expansion. Of these, two-thirds told us the following year that they went on to increase revenues and profits.

With the UK manufacturing sector enjoying increased confidence and long term growth, it doesn’t need a leap of faith to deduct firms have been turning to outsourcing as a means to help them to focus on their expansion strategies. Figures from the British Chamber of Commerce, based on a survey of almost 7,000 companies in the manufacturing and services sectors, found 42 per cent of manufacturers reported a rise in domestic sales in Q2 2014. This represents the highest reading since the survey began in 1989.

The second factor is back office outsourcing is gaining more universal appeal across industries. Research from leading professional services network Grant Thornton recently identified that two in five firms globally have outsourced a function or plan to, with back office services like accounting, IT and HR the most likely to be outsourced. In short, firms increasingly appear to be seeing outsourcing as a strategy of becoming more flexible as well as efficient.

You just need to look at the local government market – the long-time vanguard of UK outsourcing – to see how this strategy has been implemented in a bid to deliver more. The data from our index shows local authorities remain convinced of the strategic benefits of outsourcing and are committing to higher value, second-generation contracts.

Our latest study found for the first half of the year three quarters of all local government contracts signed were extensions, renewals or the replacement of incumbents. The average deal value in local government also increased by 67 per cent year-on-year. This depicts a mature, developing market and demonstrates that, against a backdrop of continuing austerity, clients see their partnerships continuing to deliver value.

Whether we see BPO in manufacturing reach this level of maturity remains to be seen, but if UK outsourcing can support the sector’s continuing recovery then it’s already welcome news.

☛ Debra Maxwell is managing director of business process outsourcing at arvato UK.

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