National Association for Effective Outsourcing

OFFSHORING - FRIEND OR FOE?

The recent noise in the media would have you believe that outsourcing is (a) a new phenomenon, (b) is limited to the financial sector and (c) invariably involves call-centre workers from Bangalore. Of course, outsourcing, as opposed to offshoring, of the IT and BPO variety has been an integral part of business practice for decades and this is increasingly true in the public sector, explains Martyn Hart, Chairman of the National Outsourcing Association (NOA).

Clearing the confusion that fogs the outsourcing market is probably the first step. Outsourcing, by definition, refers to a process where an end-user engages the services of an outsourcing supplier to conduct one or more of its business processes. This could be anything from marketing to cleaning or IT. Outsourcing has been part of the business landscape for as long as business has been conducted, as companies have always formed partnerships with other companies.

Offshore outsourcing, or offshoring, is the headline-grabbing process. Images of Indian call centres and British dole queues abound, as trade unions and protectionist politicians warn of the dire consequences of job slippage to the sub-continent. But are these horror stories hype or the real picture?

Offshoring is definitely increasing in popularity for a number of reasons. Organisations wishing to get their call-centre work or back-office accountancy work done in a much cheaper location may look to offshoring as the answer to cutting costs. With advances in technology and improvements in infrastructure in many formerly Third World countries like India, being able to conduct a process such as answering UK calls for National Rail enquiries in Bangalore has become a lot easier. Cost isn't the only driver. Many companies cite offshoring as a way to heal the skills gap that will become a greater and greater problem in the UK as the population ages.

But there are big differences in private- and public-sector approaches to offshoring. Whereas commercial organisations can be quite open about saying cost-cutting is their core objective, the public sector has to be more reticent, bearing in mind the sensitivities of the taxpayer. For example, in the USA during the run-up to the elections both the Democrats and Republicans were wielding anti-offshoring arguments in a bid to curry favour with the electorate. In the UK, the public sector has so far steered clear of offshoring, but whether they will follow the US lead is in doubt. With Gordon Brown's budget announcement that 60,000 jobs are to be shed from Whitehall combined with the public-sector penchant for signing deals with the likes of EDS and CapGemini, a swing in government favour towards offshoring could well be around the corner. Recently, both Tony Blair and Patricia Hewitt have been quoted as saying that offshoring is commercially viable, but whether this relates to the public sector remains to be seen. After all, if the consequence of offshoring was to reduce taxes by 4p in the pound would there be many complaints from the UK tax payer?

Offshoring is an integral part of the rising tide of globalisation. Whereas, in the past, many developing countries could only really compete in global agricultural markets, the ability to provide services, such as IT, accounting, call-centre work, etc, is having a real impact on these countries' economies. In the past year, India's economy has grown by almost 6 per cent - a staggering increase. This is not solely because of offshoring, but it is a huge factor. The worry in the UK has been that developing countries will benefit to the detriment of European economies. But this shouldn't be the case. European countries will be using these offshore locations to conduct lower level work - much of the higher level operations will be retained in-house or on-shore at least. In turn, this should boost these companies' revenues, which will be ploughed back into the home nation. If the future rolls out as predicted, globalisation will have a positive impact on all countries competing on the world stage - every country will benefit, meaning jobs for all.

But it's not just economic benefits. There is evidence that globalisation and offshoring are instrumental in ironing out political difficulties. Look at India and Pakistan. Historic rivals, until recently they were on the brink of a possible nuclear war. But Western companies have cited political instability as one of the major barriers to offshoring. Many companies froze offshoring plans when political tension in the area began to look as if it might bubble over. India and Pakistan must have realised the potential economic benefits they were in danger of losing out on (Pakistan is trying to establish itself as a major player too) and this must have been significant when it came to the decision to accelerate the peace process.

India is undoubtedly streets ahead in the offshoring game, currently supplying 75 per cent of offshored services (according to research company, Nelson Hall), but there are other countries close on its heels. The Philippines is the second biggest player with 15 per cent of the market, and more countries are keen to get in on the act. From Egypt to Brazil, South Africa to Mauritius, countries are looking at their infrastructures and skills sets to see what services they are able to offer. Many of these countries have high graduate numbers and good language skills, so voice work is a key market. Also, many low-level administration functions and bookkeeping work can easily be offshored, so these are other potential areas. IT skills are particularly strong in countries in the former Eastern block; this means that any type of software development and programming, to outsourcing maintenance of a whole IT infrastructure, is possible.

But outsourcing doesn't have to involve sending your business processes off to some far-flung location. Companies have historically tended to favour local companies when it comes to outsourcing a business process. And this trend for offshoring in no way signals the end of onshore outsourcing (outsourcing to a company that is based in your own country), or a near-shore location, such as somewhere in the EU.
Despite most companies being happy with their offshore service, offshoring has received some bad press. There have been media horror stories flying around about poor offshore service and fraud, and research showing companies could be damaging their reputations and losing market share by offshoring call-centre operations. As a result of this, some companies have publicised their anti-offshoring stance and used it as a marketing ploy to win customer favour. Nationwide has done this just recently, saying that they fully intend to keep operations onshore in the UK.

And the benefits of onshore outsourcing are multiple. Again, the argument is to use the expertise from another company to conduct your accountancy back-office operations, for example, which means that you don't have to provide any resources in-house and frees your organisation to concentrate on their core business. Using an outsourcing partner in the same country also means that cultural hurdles and language problems are evaded and legal and technical processes will all be familiar.

The public sector is probably the biggest devotee of alternatives to offshore outsourcing, for reasons explained earlier. But the public sector has become an increasingly prolific user of outsourcing services, nonetheless. For years, the NHS has been outsourcing processes from IT to cleaning and catering, and using UK companies to do it. Obviously, with resourcing pressures, it makes sense for them to have a process conducted by outside experts, rather than do it themselves. But organisations, whether public or private, have to make sure they are still maximising the budgets they have, keeping a tight reign on the process and do not outsource for outsourcing's sake. When outsourcing deals go belly up, it's usually because the end-user has lost complete control of what is happening. The process needs to be governed carefully on both sides. Communications is key.

Obviously, another alternative to outsourcing is to conduct your own processes in-house. This can be a viable option for some companies, but to provide resources for expertise in-house can prove a massive drain, especially for smaller companies. The NOA often advises companies to keep operations in-house, if it is the best solution.

Whether the public, politicians, commercial and public organisations like it or not, it is undisputed that outsourcing, and offshoring, is here to stay. But in order to make the most of it and limit damage of any sort, it has to be managed in the best way possible. Thorough research of potential partner and destination, airtight contracts and achievable SLAs are all part and parcel of sensible outsourcing practice. Offshoring could well initially appear as the enemy of the UK economy and employment, but harnessing it in the correct way and embracing the rising tide of globalisation could be beneficial to all countries concerned.

The NOA is an organisation that advises companies on outsourcing and lobbies on best outsourcing practice. For more information on outsourcing please go to the website (www.noa.co.uk).