EU

Outsourcing wobbles: Blip or something more telling?

The latest stats might suggest all is not well with outsourcing, but the expert view tells a different story.

Despite falls in contracts and deal value, the arguments in favour of outsourcing persist. Image: Shutterstock

Outsourcing is apparently going through a tough period, with spending and new contract numbers down and a sizeable proportion of IT leaders unhappy with existing deals.

But experts say outsourcing still offers a number of benefits to business and will continue to grow, despite the present issues.

Figures from the ISG Outsourcing Index, covering contracts worth more than €4m annually, show that EMEA deals in the first quarter of 2013 totalled €1.5bn, a 20 percent decline over the same period in 2012 and a 30 percent fall on the previous quarter.

In the Americas region the decline was more pronounced, with the total deal value of €1.2m, down 39 percent on the same quarter in 2012.

The number of new EMEA contracts also fell - to 105 deals, a 15 percent year-on-year fall. In the Americas the decline was again greater, with the 90 contracts representing a 38 percent reduction.

Decline in mid-sized outsourcing deals

However, ISG director David Howie said when it comes to larger deals, the picture remains relatively strong. The fall has been greater in medium-sized deals.

He also distinguished between the fortunes of IT outsourcing (ITO), which shows declines in EMEA and the Americas region, and business-process outsourcing (BPO), which is growing in America and only marginally declining in Europe.

"Actually, we're optimistic there is underlying strength in the European BPO market. It's just that we didn't see those one or two big deals that would have made the numbers far rosier. But we would expect them to pop up in the next quarter," Howie said.

"However, the ITO numbers are weak - and they are weak in the US as well - and we don't have single explanation for that. Clearly, all these figures lag the activity because they represent deals being signed which then take some time to filter through," he added.

Leslie Willcocks, professor of technology, work and globalisation at the London School of Economics, said there is no let-up in the overall growth in ITO and BPO, even though there are sometimes big variations between different regions and countries.

"Undoubtedly the recession is having effects, but in some ways it leads to outsourcing growth and ways of cutting cost and headcount. There are also countervailing trends - for example, governments doing or gearing up to do more outsourcing," according to Willcocks.

Outsourcing deal numbers

ISG's David Howie also argued that the figures are affected by the present economic slump but felt there is more clarity about the next few years.

"It's going to be grinding along but at least there is less uncertainty. As a result activity has picked up. If you look at the deal counts in EMEA, they are pretty healthy. They've tailed off a bit but it's still there or there-abouts," Howie said.

"There is an issue and it must be related to macro-economics in some way. There's a sense in which because the deal numbers are sort of OK then some of the decline in the [amount being spent] is due to smaller contracts being sold, which in part could be just due to a lot of cost pressure on those contracts," he said.

The emergence of the cloud may also be muddying the figures, with some things that would have been in a traditional ITO services contract now bundled up under a cloud deal and appearing potentially as a BPO.

"It may well be that there is a tiny bit of cannibalisation between BPO's strength and ITO's decline but I think that is only part of the story. There's a genuine drop off in ITO annual contract value," Howie said.

The LSE's Professor Willcocks also doubted that the cloud is having a big effect on outsourcers' earnings.

"A lot of service providers are cloudifying their offerings or at least selling cloud capability as well," Willcocks pointed out.

Dissatisfaction with outsourcing deals

Meanwhile, a study from outsourcing consultancy Alsbridge suggests that about one in four IT leaders is unhappy with at least one of their existing contracts. Three out of four are thinking about renegotiating or retendering two or more outsourcing deals.

Some 40 percent of those IT leaders polled also said they had left too many details to be confirmed after the signing of the contract.

The main reasons for wanting to renegotiate are changing technology needs, cited by 54 percent of respondents, a reduction in the benefits derived from the arrangement, 49 percent, and a need for a new delivery model, 48 percent.

Other reasons include changing business needs, a fall in the market rates, and a need to cut costs, all cited by 46 percent of IT leaders.

About

Toby Wolpe is a senior reporter at TechRepublic in London. He started in technology journalism when the Apple II was state of the art.

26 comments
BlueCollarCritic
BlueCollarCritic

Outsourcing is just the latest in a string of economically damaging ideas that we can thank American corporate executives for helping bring about. Outsource is an excellent slow burn method for relocating wealth out of one country and into one or more others while killing the local economy at the same time. Id like to see any of the CEOs of any of the Fortune 500 corporations explain to me how their customers are expected to keeping buying products and services if their jobs have been offshored by their employer? If America had but 10 companies and those 10 companies provided all the goods and services that were needed in America and one of those decides to off shore its support Department it has then decided to relocate part of the economic growth to another country because thats where the wages will go. That means less wages to those in America. That in turn means less money to buy goods and services. The economy can still grow and expand after this but once enough of the remaining 9 companies decided to follow suit you will eventually reach a tipping point and sales will drop for the companies who had been benefiting from offshoring. Once that happens additional and often more drastic cost cutting measures are implemented and that in turn pushes the economy towards a crash. Offshoring is the corporate executive of Having your cake and eating it along with several other persons cake.

jbones39
jbones39

Outsourcing technical help to places where the English speaking ability, although technically adequate (i.e., skills in speaking quasi English) results in disgruntled, annoyed, disappointed, dissatisfied, peeved, vexed, complaining, distressed, perturbed, ungratified, and upset customers. How we (technically based businesses) decided that the outsourcing of technical help by phone to offshore companies was, in fact, "communicating" with our customers at any reasonable level is a profound mystery to me. It seems to make only angry customers. Speaking as a tech at a workplace with more than 1000 computers, the customer aversion to being forced to call foreign (again-technically English speaking) "help" often exacerbates the problem by causing the client to either refrain from reporting problems until there is no other course of action possible, circumvent the problem by using alternate methods (which perhaps obfuscates the underlying basis of the original problem), or move to a different workstation. It seems to me that one of the prerequisites of having someone on the phone to answer technical questions should be that they are able to speak fluent "Hillbilly". Of course, this doesn't even speak to the problem of customers that are outside of a workplace environment where a local tech might be available, as is the common guy who has problems with his laptop or printer. The problems in communicating (I dare say on both ends of the conversation) are palpable. I don't believe that some businesses really understand what "customer service" means.

mjc5
mjc5

After more than 30 years, I can state that there is a continual battle between insourcing and outsourcing. It usually goes something like this: Management: "We can save a huge amount of money by outsourcing. There is no downside. We can get rid of a lot of people and save on payroll, and these outsourcing people can do the work for a lot less. Seems like a no-brainer." .......a year later. After changes to the specs, and finding out that you have to pay more for it, and that the changes cause a schedule slip, and that when you try to pressure them, you find out that you are just another customer. ......over time, departments start adding more in house people, because they were bit by outsourcing, either through schedul slipping, loss of money, or even teh quality of the work. Eventually, there isn't any more outsourcing. Then at a meeting of management, the subjusct of outsourcing comes up. They look into it, and....... get ready for it........."We can save a huge amount of money by outsourcing. There is no downside. We can get rid of a lot of people and save on payroll, and these outsourcing people can do the work for a lot less. Seems like a no-brainer." Rinse well and repeat.

laBaronRouge
laBaronRouge

RBC IT out sourcing seems to back-fired on their face when it hit the media. With the persistence "Boycott Royal Bank Of Canada" face book link keep digging out info of other companies and the amount of work they have out sourced. That seems to have cause some dis-comfort with the government that they actually promised new legislature designed to limit outsourcing. I guess we will see how out sourcing fare in the future with the new laws.

TRgscratch
TRgscratch

that outsourcing contracts are down, I don't think the cause is American companies suddenly realizing the outsourcing is bad. In this "jobless recovery", companies are realizing that they can make record profits without hiring, and that includes not 'hiring' off-shore employees as well

EnEm1
EnEm1

The entire "outsourcing" binge began with US corporations wanting to move their customer-service departments offshore to countries where English is a second language and pronounciation depends on the local lingo. US corporations then saw other ways to add to the bottom line. With dollar signs dancing in their eyes, they willingly sold our country down the river to any third-world posturer who offered services they couldn't deliver. This offshore move was further augmented by do-gooder not-for-profit and charitable organizations that belligerantly defended the rights of third-world countries to a share of the pie. Organizations like the Gates charities and American universities affiliating themselves to foreign institutions have done more harm to the average American that the US Congress ever could. We need to look inward, to consolidate and regroup, so that we serve American interests first. The first step is stopping or trickling down immigration of foreigners who hit our shores from a socialist world and who arrive here on self-mde 5-year plans to make money, which they see as a necessary evil and then return to their lands to live like kings. They take from the American economy and wire their savings back home to be invested in their country's economy. Take a look at the lax rules for obtaining viss. The worst offenders are th L1A, L1B and O-1 visas handed out for "Intracompany Transfers"! How could this have come about unless there was collusion between members of congress, US corporations and Immigration? While our focus has (intentionally?) been deflected to illegal border crossings from Mexico, this insidiopus exodus has been given insidious support. Result? We have third world individuals "competing" for our jobs by dropping their salary expectations. The average American is considered not to possess job qualifications that we suddenly only seem to find amongst foreigners! Quasi-government organizations like Fannie, Freddie and Sallie are overrun with happy, overworked and underpaid individuals who could never have dreamed of earning in dollars and saving in Rupees.

mdhemphill
mdhemphill

Maybe this is just another period in our history of jobs or skills being replaced for either technology or money? When the Industrial Revolution began, it eliminated the need for companies to rely on manual labor and more on technology to increase production and generate more profits. It also helped push the need for more education in order to run the technology that was needed at that time. Now, it is a different story, instead of making the case for better technology to increase profits and reduce manual labor. The companies have decided to reduce experienced costly workers for more inexperienced labor outside of the country to reduce internal employees and generate profit. I agree, with many others that this does sound great for a few months or years. Or for certain aspects of the business, but in the long term what is the company left with? How do you maintain your competitive edge when you don't have employees that have learned how that company performs it's daily business from the ground up? I guess you just get the next guy whom is only concerned with learning the fast art of Outsourcing positions to generate company profit for today and not for the future.

jgmsys@yahoo.com
jgmsys@yahoo.com

......skeleton crews that are left, and hard pressed, to clean up the messes that the offshore "talent" creates. There are some deals that demand regular bonuses, while onshore labor gets the shaft, often having their bonuses revoked or worse offenses, such as furloughs and layoffs. Really, people, is offshoring really that great an idea? I don't think so. When profit becomes far more important than taking care of those employees who have truly made the company a success, especially when it comes at all costs, whoever makes those decisions seriously needs to look themselves in the mirror and ask themselves how the hell they can possibly sleep at night with this affront on their consciences. Oh, that's right, I forgot...they HAVE NO consciences!

dkramer3
dkramer3

When too many companies in a society outsource, there ends up being too many consumers in that society that are unemployed or under-employed. This leads to a reduction in sales, which leads to lost revenue, which in turn leads to a recession. If, as a society, we want to fix the economy long term instead of just boost the economy for the short term, we need to in-source as much as possible. This would give the american consumers the funds they need to start spending again, which would raise revenues, and cause economic growth. So what I guess I am trying to say, is that in order to calculate the true cost of outsourcing you have to take into account the loss in revenue due to stripping your customer base of the funds they need to buy your product.

jonnyItunes
jonnyItunes

I'm very surprised not to hear that companies were disappointed with the quality of work done. Maybe my experience with outsourcing/offshoring is not typical, but I have seen nothing but bad quality of work, failure to maintain standards, and an inability to be flexible when needed. as bswinarski stated earlier, there are situations where it can be beneficial but is most definitely not a long term solution.

casey
casey

Pull out your textbooks on capitalism and you will see the same 2 patterns repeating over and over. 1) Shifting costs, be they material or labor, to lower cost substitutes is how the game is played. Advances in technology (primarily communications, but also manufacturing) makes the cycle continue to accelerate. 2) Mob behavior driven by the promise of huge profits or drastically cheaper expenses. Outsourcing, be it ITO or BPO is just following its natural course.

kev0055
kev0055

Almost all jobs in IT have become short term contract jobs farmed out to third party recruitment agencies who pay peanuts with no bonuses, job security or benefits, with staff turn over almost on 3 or 6 months basis with no adequate hand overs or taking over processes with non-existent training leading to "hell holes" which in turn reinforces the resignation cycle. IT has become a sweat shop commodity industry. Why bother with IT? Join the finance industry instead.

Gerald_Hilton
Gerald_Hilton

OK, I have to say this in all honesty. Outsourcing is only good in theory, and partly in practice. I formerly worked for two outsource companies in the Netherlands. One was a hosting and ISP company based in Dallas, TX. The other was a component outsourcer for HP, Apple, Blackberry, Riverbed, and a HDD manufacturer’s distribution point. The first mentioned has proven that a Data-Center can be leaned out to just a few people per 8 hour shift to manage up to 26000 servers. Automation is wonderful, employment is reduced. I guess Lean Thinking was what they needed from me, I taught them, and then they ran with it, making me expendable. OOPS. They host businesses from the USA to Russia, with redundant locations around the globe. They host anything from AT&T to XXX (Adult) sites. The rule is this: “If I”. It’s allowed in a country anywhere, we’ll host it. Just send money.” The later is a global outsources based in St. Petersburg, FL. Their specialty in America started with circuit boards of high quality. It’s just cheaper to get your Grey-Market components assembled by unqualified personnel somewhere else. This is a company that is able to hire people through temp agencies of questionable reputation (basically slave bureaus) and theoretically get the job done cheaper. This is a falsehood as shipping via logistics companies to an address and charging for the service would require the material not to be returned the next day as you are receiving the material you sent to yourself. Internal shipments are way cheaper, and the logistics department can be fired and rebuild from scratch. Material handling at both locations was a joke at best as HDD’s are not to be dropped 6 meters, according to Seagate and WD standards. Unless, you are manufacturing scrap material. Same with LCD displays motherboards, circuitry, memory, etc. When the temp agencies get up to 70% profit on the workers they send out, and those personnel find out they are being used as slaves basically, they don’t care. The consumer prices increase every few months as the new models are coming out, and that is just the covers of the computers. The internals are the same as three years ago, if not older. This goes to prove that the shiny garbage sells, and the real quality is grossly overpriced. In addition, to top it off, the claim to make a redundancy cutback only means that that part of the business is not shut down, but merely moving to an Eastern Bloc country of India and the likes where the labor and the taxes are cheaper for the next five yeas, and the wages are less than €2.00 per hour. Business wise, that’s smart. But these are the same companies responsible for the unemployment in the countries they leave as they affect related companies in those countries. Only the core manufacturers in Asia continue to profit.

Rob3214
Rob3214

no entry level positions in IT (except offshore) where are the next generation of IT employees (those that can code I mean) going to come from ? offshore of course.

Tony Hopkinson
Tony Hopkinson

That would suggest that initial perception that outsourcing would reduce costs was in error would it not? Or did I the clueless propeller-head misunderstand again? A blip? Not really the true market for outsourcing was far smaller than you hoped, this is a rationalisation. All those myopic fools who bought into the "This will save you money" message without spending one clock cycle thinking about the real proposition on the table, are simply realising how you helped them to delude themselves.

bswinarski
bswinarski

Outsourcing was the buzzword of the '90s in many industries, not just IT...though in fairness our industry set it as a standard way of doing business as our IT infrastructures were still in their virtual infancy. Like many 'cost saving' measures, analysts downplayed the long-term results of outsourcing skill positions and looked only at the short-term (if significant) savings that compared to hiring a full-time worker in that role. If done correctly, outsourcing is still a good deal in certain situations (we need a programmer to redo a specific system that won't be touched for another 5-10 years). However, IT execs decided to overuse it and the result is sadly predictable. Instead of weaning new talent or expanding the horizons of existing employees, we have put short-term employees into long-term positions, leaving us with a talent vacuum and back at square one years later. Nobody to reliably train a replacement and the same problems that reared their heads 20 years ago. In-house training results in faithful skilled employees, which outsourcing removes from the equation. Outsourcing is an example of corporations breaking the social contract and now they are paying the price. Hopefully, execs learn from this and start fostering talent again...but I doubt it.

lolfml
lolfml

Outsourcing: hiring questionably-skilled workers from essentially slave labor providers, who have very little loyalty to the outsourcing company. And the outsourcing company ends up paying more than for employees. lol - PT Barnum was right - there's one born every minute. It would be best to outsource IT "executives".

stnwall
stnwall

These self-procliamed experts drank the outsourcing koolaid and cannot fathom that they are often bad deals. There are so many gottchas in these things that many are realizing it is more trouble than it is worth becasue there is often little to no savings.

TRgscratch
TRgscratch

its time-frame is beyond the next election

Tony Hopkinson
Tony Hopkinson

around outsourcing and the soon to be horrible effects on a domestic economy, it's a total failure in basic business terms. Foreign workers are cheaper than domestic ones, well okay, true But when you are looking for a provider, domestic workers aren't in the picture. So now you are choosing between foreign outsourcer1 and 2. Their labour costs are essentially the same, so how are they going to compete for your business? Get better people and be more efficient? Buy better kit and be more efficient? Invest and grow their core business? Where would they get an example like that from, not their customers is it? Maye they outsource their IT, some where even cheaper?

dave the IT guy
dave the IT guy

Our organization's top leadership were sold on IT outsourcing by a company promising to save them lots of money. Then as the details of the contract were being nailed down all of the savings disappeared and it turned out that it was going to be 20% more than keeping the work in-house - but they did it anyway! They did it because they wanted a more "flexible" environment and because the company's top executives had decided that they were not in the business of running data centers. So a 20% increase in costs allowed them to give away control of their server infrastructure with the promise that in the future, if the economy tanks, they won't have to fire people.

MaSysAdmin
MaSysAdmin

When I first saw the outsourcing craze in the 1990s, I saw the infancy of the problem that heavy industry was having. I sold chemical equipment to various heavy industries such as automobiles, paper, steel and chemical plants. With the retirement of the WWII generation at its end, the men and women who knew how things work no longer had the supply of apprentices to teach. Instead of quality high-end equipment that worked great but required training to maintain, they were buying low-end equipment that broke all the time but could be repaired by anyone with 10 minutes of training. However, this meant that in 20 years, the entire plant would be running on highly-inefficient equipment with no one who knew how to work on better systems. We now see the same employment gap in IT. We've shipped all the entry-level jobs where we have all cut our teeth offshore and now the executives complain that they have to go offshore to get people with 10-20 years of experience.

bswinarski
bswinarski

The difference was not 'true' savings, but perceived savings. Short term (this month, this quarter, this year, 5 years) there is a definite savings. However, businesses are long-term endeavors...or should be. By long term, if you look at the cost savings of training a new employee once and having them for 10-20 years, even with the cost of benefits, fair wages, etc, vs paying a flat rate per hour/annually for an outsourced company doing their role, the employee will win. The issue is actually double-edged...the companies didn't want to invest time into employees that will 'just find another job and leave anyway' and employees don't want to stay with a company that expects them to leave and treats them so. This led to (during the outsourcing craze during and following the tech bubble burst of the late 90s/early 2000s) companies hiring other companies to ensure they had 'stability' in that role. So it made sense. They were saving money overall and filling a critical role. Now we see the other side of that scenario...it's not easy to keep an employee happy vs hiring an outsourced company to do the job...but the benefits down the road make it an important step if you want to endure as a company.

rafezetter
rafezetter

I don't work for HP but I know four people that do, only one of which has a direct contract the rest are outsourced, however the other three have been working at the same HP base in Bristol (UK) for years. They have also told me that they are NOT allowed to apply for direct contract jobs (and don't have access to the internal jobs section of the camp network), and that includes a few senior project leads they know are on outsource contracts. They think the HP belief is that by promoting from within - including previously outsourced "staff" it may cause tensions with colleagues so better to get a new guy in. If it was me personally I would argue if you think I'm good enough to be project lead you give me a direct contract.... but somehow I think that you might end up talking yourself out of a job. I also personally think outsourced staff may not be working to full potential as they know at any time they get one month notice and that's it; you're gone. Do the japanese outsource? Everytime I read about work over there, it always seems to have the underlying factor of valuing your workforce and understanding a happy workforce is a productive one.

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