Outsourcing is a key cost saving strategy for many companies that helps them maintain a profitable bottom line. As Western countries streamline their own manufacturing sectors and developing countries compete for outsourced jobs, some significant changes could be coming.
Under 30 CEO notes, “With the expected rapid growth of the global BPO market at an annual rate of 5.4 percent to $ 93.4 billion in 2015 , it is obvious that most countries would leave no stone unturned to relish a slice of the pie. Irrespective of their levels, service providers and business industries will strive hard to create new incentives in order to attract BPO jobs. Such incentives would definitely include reduced taxes, fees and of course free or subsidized rates for English speaking courses and technological nuances.”
The competition to win outsourced overseas jobs is ramping up, and 2013 could bring some new trends that may call some of the conventional wisdom about outsourcing overseas into question.
1. Outsourcing Customer Service through Social Media and the Cloud
As social media becomes a common way for consumers to interact with businesses, companies who outsource their customer service will need to pay greater attention to social media trends and customer responses. Rapid response to social media complaints and problems will be essential for firms who want to remain competitive and relevant.
In addition, as more firms stretch out their services into outsourced overseas operations, they’ll need to think of not only the feedback of customers but the security of customer data online. The outsourcing blog Work Monk shares, “security liability limits have become one of the most contentious negotiation issues between outsourcing customers and vendors today.” If overseas firms can’t provide rapid responses and security, outsourcing could be viewed as more trouble than it’s worth.
2. IT May Not Be Outsourced for Many Companies
Some western manufacturers, such as GM in the U.S., have been discovering the value of keeping I.T. services close to their engineers. This remains a relatively isolated trend, but if GM is able to keep the cost of on-shore I.T. down, many other companies will take notice. At this point, outsourcing remains the conventional approach to saving money, but GM’s success with these changes could create an enormous shift in the I.T. industry.
According to Eric Savitz at Forbes, “lots of companies stand to lose if GM triggers a shift in the conventional wisdom, and everyone decides that outsourcing is now a bad idea. Among the vulnerable to such a plan are the whole Indian IT industry, as well as U.S. tech giants like HP, Dell, IBM and Xerox, all of which have jumped headlong into the IT services business in recent years.”
3. Manufacturing is Slowly Coming Back to the West
As wages increase in countries like China and India, while western economies continue to struggle with weakened currencies, there are renewed doubts about the value of outsourcing in order to save money. In fact, Forbes reports, “Manufacturers, including Caterpillar (CAT), Ford (F), and General Electric (GE), are starting to move some production back to the U.S., although it’s still just a trickle. The two factors that drove companies overseas, cheap fuel and labor, no longer favor far-flung ventures.”
Even more visibly, AOL jobs notes, “Starbucks Coffee Co. is perhaps the latest example of a company bringing jobs back to America, a trend that some are calling ‘reshoring.’ The Seattle-based company recently turned to a struggling East Liverpool, Ohio, pottery maker — not a Chinese one — to manufacture 20,000 beige coffee mugs emblazoned with the chain’s iconic logo, which Starbucks sells for $ 10 each. ‘[E]ven though it’s more expensive to manufacture this mug in the U.S. than it would be in China or Korea or Mexico, this is what we need to do,’ Starbucks CEO Howard Schultz told NPR.”
When a leading company such as Starbucks jumps on this trend, we can only expect that more company’s beyond the manufacturing sector will begin to explore the both the financial and the publicity upside of bringing jobs back from overseas. If a company can adopt a competitive edge by touting the creation of local jobs, there’s every reason to believe more companies will follow Starbucks’ lead.
While manufacturing shouldn’t shift significantly in 2013, these trends in wages and manufacturing locations are important to watch. The keys will be whether western manufacturers can manage their inventories effectively in order to keep their other costs down and whether fuel and labor prices remain stable. Another significant recession in the United States could prove especially problematic for jobs that have been outsourced overseas, as the demand for returning jobs stateside will increase.
4. The Growing Middle Class of Developing Nations
One of the most attractive reasons to outsource to developing nations isn’t necessarily to always cut costs. Business reporter Merrill Matthews notes, “A 2011 report from the U.S. Commerce Department says that about a third of the roughly 31 million U.S. employees of multinational firms work abroad — and growing. That’s because with only about 4 percent of the world’s population and a burgeoning middle class in several heavily populated developing countries, such as Brazil, Russia, India and China, the fastest growing markets are outside the U.S.”
While outsourcing may not save as much as it did in the past, the growth of middle class markets in 2013 may prove strong enough to keep many firms overseas. In fact, many companies are simply opening new branches in overseas markets, leading to a stronger middle class in many markets. This blurs the lines between jobs that are “outsourced” overseas and jobs that are simply created in new, international markets. Whether companies are outsourcing or growing, the lure of new markets may be strong enough to keep many jobs overseas regardless of current economic and political trends.
5. The Growth of a Global Business Culture
One of the reasons why outsourcing may remain relatively stable is the increasing comfort of doing business overseas. Companies are beginning to adopt similar expectations and standards, making it much easier to work with an overseas firm.
Outsourcing expert Robert Kennedy shares, “Now 30% of the MBAs at U.S. schools are international, and they’re going home after they get their degrees. They used to come to school in the U.S. and stay here. These countries have liberalized since then. They’ve got their own venture capital groups and start-ups. That really closes the cultural gap. It’s much easier for someone at Citibank or AIG to do business in India if they’ve been to the same schools and they use the same software like PeopleSoft. That’s made it much easier to go abroad, as well.”
In many respects, outsourcing jobs overseas is a relatively recent development. As the global business culture grows, entrepreneurs in overseas economies will continue to learn how to attract jobs from western companies. Outsourcing may well survive simply because it becomes a standard way of doing business.
6. I.T. Security Concerns for Outsourcing
As more business is conducted through cloud computing and through other digital means, security has become a huge concern with outsourcing. If security concerns and costs continue to rise, companies may decide that it is more cost effective and safe to keep their business all in one location. There have yet to be significant examples of IT security breaches that have become widely known, and therefore the key at this point is for overseas companies to remain vigilant and to communicate clearly their I.T. security plans.
7. There Will Be Shifts in Outsourcing Pricing Models
As uncertainty looms and competition increases for outsourced business, firms throughout Asia will be experimenting with their pricing structures and contract terms. 2013 could prove to be a tumultuous year for outsourcing as some companies pull out, others try it based on attractive (and potentially risky offers), and still others restructure their outsourcing contracts.
It will be particularly challenging for overseas companies to determine whether they should simplify by focusing on a single service or continue to branch out into a variety of other areas. As it stands, most companies have been offering a diverse range of services. This may change sooner than later.
Under 30 CEO notes, “we might witness small companies which provide specific mobile application development solutions with all the software fully developed and crucial to their solution packages. This decreases time to market, business risks, costs and the convenience of proven software with little or no transformation needed.” Small and focused companies could begin to take a place in the overseas outsourcing economy, changing the shape of outsourcing for many companies.
8. Application Development Will Increase for Outsourcing Firms
Companies that are currently exploring how to efficiently outsource their labor overseas will be looking to applications on mobile devices and tablet computers to assist them in managing their overseas assets on the go and at odd hours. Bill Ruddick of Datamark reports at PR Web, “Expect BPO providers to provide clients with mobile apps for monitoring and auditing outsourced processes. Features will incorporate business intelligence, dashboards, analytics and instant messaging with the provider.”
Software companies serving clients with large stakes in outsourced assets will be able to capitalize on the demand for more programs that provide the convenience they need as smart phones and tablets become standard for all industry leaders.
9. The Size and Terms of Outsourcing Deals Will Shrink
The days of large, long term outsourcing contracts may be over in many cases. Computer Weekly reports, “Large deals have all but disappeared and deals now being signed are smaller, shorter and less complex than three years ago. Yet when viewing the service providers’ published annual or interim results, turnover ranges from mediocre, (which, given the state of the world’s economy, is not bad), to the rip-roaringly excellent.”
This doesn’t necessarily mean that overseas firms will lose out. There are still plenty of opportunities to turn a profit. Rather, the nature of the outsourcing business will shift from long term deals to short term deals. Those companies able to adapt to this change can still win out.
10. Rural-Shoring Will Become Attractive in Some Cases
As the cost of rural living in the United States remains low and job demand continues to stay high, the possibility of “rural-shoring” jobs will only increase. Bill Ruddick notes, “The U.S. ruralshoring model—outsourcing processes to communities with low costs of living—will continue to intrigue companies that are not satisfied with their farshore experiences. Astute governments at the state and local levels will take a page from competing countries’ playbooks and engage chambers of commerce and BPO providers in strategies to bring those jobs home.”
Whether rural-shoring becomes a reality or not primarily hinges on whether the small, local governments in rural counties are able to effectively mobilize and present an attractive and cohesive case to companies that could move their operations back to their local communities. The rural counties willing to provide research, cost comparisons, and incentives are the ones that will determine whether this takes hold.
11. Middle Management Will Take the Lead for New Contracts
The days of running every outsourcing decision through top management are coming to a close, especially since the size of outsourcing deals are decreasing. Rather, we’re going to see more middle managers with their hands in the day to day operations of companies turning to outsourcing as a solution for specific tasks and projects.
Computer Weekly notes, “For middle management, convenience sourcing absolutely solves very real issues by providing expert services under the client’s control, with only a minimum commitment. The short-term nature of convenience sourcing allows for ‘plug and play’ replacement services where necessary. This convenience represents a double success for larger suppliers. They achieve higher margins with deals of little or no impact on their balance sheet, as they do not take on people, assets or risk profiles.”
Of course the challenge with more middle level managers coming into play with outsourcing deals will be whether they can set realistic terms and manage the deals if they’re new to outsourcing. So while the chance to increase profits through outsourcing is very real, overseas firms will need to be doubly vigilant to make sure their deals are set up with the best terms possible.
12. Shipping Costs and Supply Chain Issues Could Tip the Balance
With uncertainty surrounding fuel costs that have continued to rise and supply chain issues, the value of outsourcing has been called into question in many businesses, especially those with smaller production levels overseas. There are many firms that have tallied up the cost of shipping and the risks of a long supply chain and decided to give up on outsourcing their manufacturing jobs overseas.
The Wichita Eagle, a local U.S. paper, notes, “This is the second time in three years that oil has gone over $ 100 a barrel — and many experts say this is a lot closer to the long-term future price than $ 30 oil of five years ago. And the March earthquake and tsunami in Japan disrupted supply chains all over the world. Toyota plants in the U.S. are operating at less than half capacity.” The price of fuel alone is enough to make accountants at large outsourcing companies step back and take note. How much longer will outsourcing overseas pay off if fuel, wages, and production costs all continue to go up? The fuel cost alone could be the deciding factor for many companies.
This uncertainty over long, vulnerable supply chains is a major concern for many manufacturers who have sent jobs overseas. Increasing fuel prices, delays, and complications with storms or natural disasters all need to be factored in for companies who include outsourcing as a major part of their business plans. The general trend is that larger companies with a higher volume of products made overseas may still have plenty of incentives to keep their existing supply chains in place. However, smaller firms or firms with a smaller amount of outsourced products may find local production to be more attractive.
Cutting costs is on every company’s to-do list, and outsourcing has been one of the ways small and large businesses keep their expenses low while still providing all of the services their customers need. In 2013 we could witness some significant shifts to outsourcing if western companies follow the lead of a few key manufacturers who are pulling out of countries like India and China.
As western companies analyze their costs and commitments in light of outsourcing and overseas companies determine their focus and security offerings, it is clear that outsourcing could undergo some significant shifts in 2013. In addition, outside factors such as economic trends and transportation costs could force the hands of some outsourcing firms and businesses in unexpected directions. For now, it is likely that 2013 could be a year of testing as businesses experiment with new models and adapt to new trends.
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