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Outsource magazine: thought-leadership and outsourcing strategy | March 27, 2015

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Is a bad economy good for outsourcing?

Is a bad economy good for outsourcing?
Stan Lepeak
  • On September 14, 2010
  • http://www.kpmg.com

Whether or not negative economic conditions cause organizations to outsource more or pull back from outsourcing is a matter of debate.  Intuitively outsourcing a means to cut costs is good medicine for organizations in a sick economy yet those who tally up outsourcing deals tell us numbers are down of late, especially in Europe.

On the one hand outsourcing appeals to organizations seeking to cut costs and defer or limit future investments.  On the other hand the upfront costs of outsourcing or the complexity of undertaking or expanding efforts become stronger gating factors during difficult economic times.  Future economic uncertainty also makes it difficult for organizations to develop long term plans and enter into multi-year outsourcing arrangements.  Difficult economic times have also elevated the debate over offshore outsourcing as part of a larger upswing in trade protectionism, making it in some cases more difficult or at least more politically incorrect to undertake it.

While overall economic conditions can both drive and curtail outsourcing’s growth, in my experiences and based on what EquaTerra is seeing in the market through client engagement and in our market research studies it is more a driver than detractor.  For example, market studies EquaTerra has conducted across major European markets over the past year have all found that the majority of outsourcing buyers plan to expand outsourcing efforts going forward overall and via the use of near or offshore resources.  Based on an analysis of over 675 current ITO deals, EquaTerra found that 54% of buyers “certainly” or “probably” will outsource more in the future while just nine percent indicated they will likely outsource less. Other research in the Americas has returned similar results.

Negative economic conditions also heavily impact buyer usage and preferences for outsourcing services.  Deal flow and sourcing disruption remains common in the market as buyers struggle to formulate and then execute sourcing strategies.  It is often difficult to define a clear sourcing plan because of uncertainty over how an organization will look in the future and what will become its key priorities and strategic issues and needs.

Organizations today are also carefully considering alternatives to outsourcing such as internal process improvement efforts – or doing nothing for the time being.    Interest in cloud computing and its derivatives, as a complement or alternative to traditional outsourcing and commercial enterprise software models, also continues to grow.  Whether or not you classify service delivery models like SaaS (software as a service) as true outsourcing, weighing cloud and related SaaS opportunities impacts outsourcing efforts and decision making processes.

Herein lies the challenge for most organizations.  More  important than the drivers for outsourcing is how to execute it successfully.   Always difficult this becomes more challenging in disruptive economic times.  Current and prospective outsourcers needs to balance their strategic desires with their tactical capabilities to source and manage outsourcing efforts and prioritize the achievement of key goals that are most important in today’s market.