RayooTech – IT Outsourcing

Regardless of changes in the outsourcing industry business model and other temporary setbacks caused by the global economic downturn, the era of globalisation of services production has only just begun, consulting firm A.T. Kearney said in the latest edition of its Global Services Location Index report.

Even as politicians were using global services off-shoring as an easy scapegoat for current economic woes and high unemployment levels in their home countries, stoking resentment against globalised firms and their foreign host countries, firms were still responding to intensifying cost-cutting imperatives by moving operations off-shore.
"Although signs of a slowdown in the growth of global services are evident in this environment, don’t expect off-shoring to end. In fact, the global services industry’s full potential is ready to be tapped," the report said.

Industry in transition
After the 2008 financial crisis hit, A.T. Kearney forecast "an immediate and significant impact for global services outsourcing, considering that financial services firms were the biggest customers of services outsourcing and the United States was the world’s economic centre of gravity. Today, we look back at an industry that has certainly endured two lean years."
A number of factors contributed to a global business environment in a state of flux – contrasting and conflicting recovery and post-recovery strategies, especially in developed economies; symmetrical rates of recovery between developed and developing worlds; uncertainty about the capacity of the US to engineer a strong economic recovery; persistent questions in Europe about its fiscal manoeuvrability, highlighted by the recurrent sovereign debt and banking crises; concerns about persistent economic obstacles in Japan; and reservations about the capacity of the G20 countries to formulate unified responses to their various economic challenges.
To the off-shoring industry, this meant political backlash and talk of reshoring, or bringing services and jobs back to home countries, which has been made more attractive by the high unemployment in locations even in developed economies.
"Still, huge potential remains for globalised services delivery, as new technologies such as cloud computing help it continue to evolve rapidly," A.T. Kearney said.
Partially, that was because, despite the negative perceived impact of off-shoring, the consulting firm said that its evidence pointed to the contrary, as economic sectors that were most open to off-shoring were also the ones to record the fastest employment growth, according to the 2009 edition of the A.T. Kearney report.
"In the long run, the cost and talent arbitrage benefits for overseas locations are still great and the underlying business case for off-shoring remains intact. As manufacturing supply chains have permanently left the shores of developed economies, the same is happening to services supply chains, and a forced move to reshore them would result in significant costs for businesses," A.T. Kearney said.

Under threat
One area that had a less-than-glowing outlook despite A.T. Kearney’s overall optimism for the off-shoring industry was the tradition IT outsourcing service, often predicated on "multi-year contracts based on developing and maintaining custom code and requiring legions of programmers and on-site systems-integration workers."
In the industry’s new emerging model, outsourcers provide standardised software solutions on a per-use basis, requiring companies to combine business process outsourcing services with cloud-based technology, enabling customers to outsource entire business processes and only pay for the information they access or use.
In the past two years, a variety of outsourcers have worked on acquiring the complete stack of capabilities required to survive the shift and create a new business model for the outsourcing industry, including hardware and connectivity for hosting and network capabilities, standardised software that can be deployed on shared hardware platforms or through cloud computing, and commercial strength to move from a long-term contract model to a flexible, "pay-as-you-go" approach.
"These are the preliminary steps toward what will end up being a revolution in the business process outsourcing and IT outsourcing marketplace," A.T. Kearney said.

The rankings
The top three countries in the 2011 edition of A.T. Kearney’s index have shown remarkable staying power – India, China and Malaysia have been first, second and third, respectively, since the inception of the index in 2003 and remain perched at the top of the standings thanks to deep talent pools and cost advantages.
However, wage changes and currency shifts from the financial crisis have led to major changes, as formerly lower ranked states with highly qualified labour have once again become viable options amid currency devaluation.
The most dramatic example were the three Baltic states – Estonia and Latvia, both still undergoing drastic periods of fiscal austerity, have moved to 11th and 13th, respectively, while Lithuania was 14th. The UK advanced from 31st to 16th place due the pound sterling’s fall in value and slowing wage increases.
Bulgaria retained a high place, ranking 17th, but dropped four spots, losing its distinction as the highest-ranked European Union member state.
Currency depreciation, coupled with increased sentiment for nearshoring in the US, pushed Mexico to sixth, making it the top Latin American country in the index, while in the Middle East, improving fundamentals put Egypt into fourth place – the report was drafted before the civil unrest in the country and it was unclear how much ground the country might lose because of potential political instability.

Outlook for Europe
Asia remains the dominant region whenever off-shoring is brought up, with the top three countries in the rankings and seven in the top 10, but the financial crisis has created opportunities for the developed economies of Europe.
Even though the financial crisis pummeled many economies on the continent, while fiscal woes in Greece, Ireland and elsewhere have raised the spectre that the euro could fail, the recession has once again made Europe a viable off-shoring option, in particular the countries outside the euro zone that were once too expensive or had experienced long stretches of growth.
Estonia, Latvia and Lithuania were examples of countries that have climbed in the rankings as a direct consequence of the economic crisis. Strong people skills have allowed these countries to develop small but strong business process outsourcing (BPO) and voice markets, A.T. Kearney said.
The global financial crisis hit all three, Latvia in particular, harder than most countries, propelling them into a dire situation with rapidly expanding current account deficits. But instead of devaluing their currencies, the Baltic states pursued what they called "internal devaluation," cutting wages in the public and private sector by an average of 35 per cent and slashing spending. As a result of these painful adjustments, cost levels became more competitive.
"Increased cost-competitiveness has propelled these countries to the higher echelons of the Index and has already yielded new investments in the IT/BPO sector. UK-based Barclays opened an IT centre in Vilnius in 2009, and US financial services company Western Union has announced plans to establish a regional service centre in Lithuania. Significant growth is still needed, however, to get the Baltic states on the same turf as the more traditional European outsourcing locations," the report said.
The UK rose substantially in the rankings, from 31st in 2009 to 16th in 2011, driven by steep drops in compensation costs (14 per cent in US dollar terms), but Britain remains first and foremost a demand market for outsourcing.
"In what is now a rather regular refrain on both sides of the Atlantic, British politicians have decried outsourcing in the face of mounting unemployment. On a recent visit to India, however, British prime minister David Cameron tried to put to rest the notion that the UK would prevent IT outsourcing. However, he bundled his somewhat reassuring message with a plea to Indian firms that they find a way to invest in job growth in the UK. Trade relations between the two countries have indeed become quite symbiotic, with jobs in the UK being created by Indian firms and vice versa," A.T. Kearney said.
The index features two other European countries that are among the main customer markets for IT and BPO services in Europe – Germany and France.
"We use tier-2 cities (cities in areas of the country that have a lower relative income level) in these countries as a benchmark to compare them to the offshore competition. For the UK, we use cities in Northeast England, Wales and Northern Ireland as benchmarks. For Germany, we use Saxony in the former East Germany, and for France, the region of Languedoc-Roussillon," the report said. Off-shoring locations in Germany ranked 26th, up eight spots, but France lost three places and was 44th in the index.
In Central and Eastern Europe, Poland was the big mover, up 15 places to 24th after weathering the economic troubles and benefiting from improved investor sentiment. Hungary in 31st and the Czech Republic in 35th also fared slightly better because of decreasing wage levels.
"However, the nearshoring story in Europe still shows a shift to Bulgaria (17th), Romania (25th) and the Middle East," A.T. Kearney said.
The four euro area member states hit the worst by recession and experiencing the worst public finance difficulties – Portugal (50th), Ireland (49th), Greece (not ranked) and Spain (42nd) – have not made big strides up, unlike the Baltic countries.
"While some time in coming, the crises have just started to appear in these countries. Although austerity measures are being put forward, they have not yet taken effect. They are also less likely to be as far-reaching as the extreme measures taken by other European governments (for example, the Latvian government). It should be noted that currency devaluation is not an option for these countries to increase competitiveness as they are members of the euro zone," the report said.

Untapped potential
"Regardless of changes in the outsourcing industry business model and other temporary setbacks, we believe the era of globalisation of services production has only just begun. The untapped potential is enormous. IT and BPO off-shoring are early manifestations of a larger trend that, in the long run, means that more functions can and will be located outside the countries where end-customers reside," A.T. Kearney said.
"We have already witnessed a shift in the footprint of manufacturing across the globe to the point at which emerging markets have become manufacturing powerhouses – and we can expect to see a similar development in services. As with off-shoring of manufacturing, the move of services jobs will grow less controversial with the passage of time. Much as the US and EU countries exchange a wide range of services, trading of services will also grow between developed and developing countries. In the medium to long term, demographics will reinforce this trend. As the developed world ages, it faces a choice between allowing more liberal immigration policies and importing manufactured goods and services."
Countries such as India and Egypt, with large and young populations were well-positioned to take on a greater role in delivering services to countries with shrinking labour pools.
"In the future, therefore, we will see a dramatic shift in the relative balance of service production among developed and emerging markets," the report said.

Source: http://www.sofiaecho.com/2011/02/25/1049908_off-shoring-opportunities