Isn’t outsourcing old news?
Not at all: businesses are continually finding new services that can be provided by an outside company.

IT is one of the most commonly outsourced areas, with outsourcers offering everything from software development and infrastructure provision, to systems maintenance and code testing.

The market has evolved and today business process outsourcing – where an entire function such as HR, finance or customer service is outsourced to a third party – has become a multibillion-dollar market while a relatively new offshoot called knowledge process outsourcing, involving farming out high level data analytics, has also sprung up.

The New York headquarters of the world's largest outsourcing company IBM

The New York headquarters of one of the world’s largest outsourcing companies IBM
(Photo credit: IBM)

Why should I care?
Because there’s money to be saved and, often, a more efficient service to be had.

A big attraction of outsourcing has always been the bottom line, with outsourcing companies usually providing the same services more cheaply than is possible in-house. Outsourcers can do this because they are delivering similar services to many different companies and can take advantages of economies of scale.

Delivering services from offshore can further drive down costs thanks to cheaper labour and tax rebates abroad, with offshore delivery typically offering savings of 20 per cent on average compared to in-house provision, according to analysts Compass.

It’s not just about up-front savings, however. Outsourcing companies can use their experience to change not just the IT but also to improve the way that a business operates in order to make it more efficient – by streamlining business processes, for example.

This is representative of a more sophisticated type of deal where a company sets an outsourcer broad goals, such as reducing the time it takes to bill clients to a certain number of days, and leaves it up to the outsourcer to decide how to do it. In this way companies are, to a certain extent, letting outsourcers decide how to run some elements of the business.

Traditionally, these types of deals have been the preserve of the Western companies such as Accenture and IBM, but increasingly Indian outsourcers, such as TCS and Wipro, are landing these sort of contracts. Conversely the Western companies, who have set up extensive offshore operations in recent years, have started to offer more of the low-cost, simple IT service delivery deals that were initially favoured by the Indian IT providers.

Anything else outsourcing can do for me?
Outsourcing also gives companies the ability to quickly increase or reduce the numbers of staff working on a project.

In addition, outsourcers can deliver many specialised IT services that would be expensive for businesses to develop in-house. Having specialist expertise is becoming increasingly important for the offshore providers, as can be seen from Indian outsourcer HCL’s recent acquisition of SAP consultancy Axon – a company that had also attracted a bid from rival services giant Infosys.

What type of industries use outsourcing?
Outsourcing deals are widespread throughout both the private and public sector. The public sector is predicted to increase the amount it spends on IT services by 4.3 per cent year-on-year in 2009 and outsourcing is likely to play an important role in helping the government meet its commitment to cut £7.2bn from its IT and back office spend each year.

In the private sector, financial services slowed its spending on new outsourcing contracts in 2008 as the credit crunch bit but it’s expected to ramp it back up in 2009.

Retailers are also expected to up their outsourcing in 2011 after two years of cutting back on new deals.

TK organisations will cut their spending on IT services and software in 2009 ahead of a market bounce back by 2012, the PAC/TMV report found

UK spending on IT services is expected to pick up from 2009/10
(Image credit: Pierre Audoin Consultants & TechMarketView)

How has outsourcing weathered the credit crunch?
Better than other areas of IT: analyst house Forrester is predicting that global spend on outsourcing will fall slower this year than the 10 per cent decline forecast across IT spend as a whole.

Indian outsourcing company Mahindra Satyam also believes that businesses have started outsourcing IT services again following a spending freeze during the latter half of 2008.

This thaw in spending will be helped by outsourcers offering price drops

…of anywhere between five and 20 per cent on IT services deals, according to predictions by Gartner.

In addition, outsourcing megadeals – contracts worth hundreds of millions of pounds to deliver a range of services over multiple years – have also enjoyed something of a comeback recently, as shown by the likes of BT’s £500m contract with the NHS, IBM and CSC’s £300m deals with the government’s Identity and Passport Service, and a £685m deal for HP-EDS at Aviva.

What about offshoring then?
Choosing where services will be provided from is a key decision for a business opting to outsource. Will it be onshore, in the same country that the company is based; nearshore, in a nearby country; or offshore, in a more distant country?

India is the destination of choice for offshoring

India is the destination of choice for offshoring
(Photo credit: voobie via Flickr.com under the following Creative Commons licence)

India is the global hub for offshoring, with an IT and business services industry worth $58bn in 2008 and a 50 per cent share of the global offshore ITO and BPO market.

However, India faces fierce competition from other countries. Some, like Russia and China, are challenging India for low-cost design and infrastructure services and software development, while countries in Eastern Europe and Latin America are also attracting business from Western companies, such as the UK and US, who want to nearshore.

More recently the governments of Vietnam and Egypt have been investing in improving their education systems and local infrastructures to attract more offshore work.

These challenges come at a time when India is struggling to produce enough graduates who are qualified to carry out the offshoring work. Despite this, industry watchers believe India’s headstart in the market means it will continue to dominate for decades to come.

Are Indian companies the largest outsourcers then?
Indian outsourcing companies may be big players in the world of offshoring but they are small fry in the wider outsourcing market – for example in 2008 one of the largest Indian providers, TCS, has less than one per cent of the global market share for IT services, compared to IBM’s share of almost nine per cent, according to research by Pierre Audoin Consultants.

Western outsourcing providers such as IBM and HP still dominate the outsourcing market overall.

Is outsourcing forever?
Not at all – take the example of Transport for London (TfL) which has already ditched the majority of its outsourcing contracts, with former TfL CIO Phil Pavitt saying he cut headcount and desktop and support costs by bringing 15 of 17 contracts back in-house.

Meanwhile, other companies are considering bringing some offshored IT and BPO operations back in-house to the UK, spurred by the recession which pushed them to reduce their in-house running costs, making it potentially cheaper to run the services themselves.

What does the future hold for outsourcing?
One of the biggest future trends in outsourcing has surely got to be cloud computing – where a company’s software or infrastructure services are hosted and provided remotely by their supplier.

Cloud services are often pitched as having cost benefits over their on-premises counterparts – for example, users can save money as they require less hardware in-house and have lower energy costs accordingly. Cloud services can also be used by companies that need to rapidly scale up software or hardware use for a limited period of time, such as during the lifetime of a particular project.

Major Western players, such as IBM, and Indian outsourcers, such as TCS, have already launched their services in the cloud, with smaller suppliers also in the process of developing platforms.

For everything you need to know about cloud services check out silicon.com’s cloud computing cheat sheet here.