Many Organisations throughout the Gulf Co-operation Council region, both public and private sectors, have developed their business models based on a very large component of relatively inexpensive expatriate labour. With the significant economic development of India and other countries, which have typically supplied labour to the region and the consequent increase in cost, these traditional business models are being challenged. Competition from all sources is also a significant factor.
Clearly, with the economic downturn/recession, a great deal of focus has been placed on operating costs and the staff costs component thereof. This must mean that “outsourcing” is an option that business leaders in the region must consider. Let us, first of all though, discuss what is outsourcing and what sort of benefits can be derived from engaging in this.
Outsourcing – the delivery of a business process or function for an organisation by a third party – has been with us for decades. In the 1980s major IT outsourcing deals were developed, with global suppliers like EDS and IBM leading the way. In the 1990s Business Process Outsourcing (BPO), covering functions such as finance and HR, was pioneered by major professional firms such as Accenture and PwC. And in the last decade the reach of outsourcing spread up the value chain to encompass functions which might once have been considered “core” to the organisations now employing third parties to carry them out, for example, complex accounting, analytics, and research & development.
What drove this boom? Originally the key driver was probably philosophical – “stick to the knitting” and outsource everything else was the mantra of many a business guru. Then the trend was helped by advances in technology and the deregulation of telecommunications which enabled effective access to remote sites. Even more importantly was the trend of globalisation, which brought the concept of receiving services from India, Eastern Europe or China mainstream.
But every outsourcing decision is, at heart, business case-driven. Can the outsourcer deliver what I want more cost-effectively than I can do it myself? Whether this is through shared centres, economies of scale, technology or labour arbitrage, this is the key driver behind all the myriad decisions to outsource taken in the Board Rooms of the world.
Given this, isn’t outsourcing the answer to the problems faced by organisations in the current downturn – if you can’t grow your top line, then what is left but to cut your bottom line to maintain margins? And outsourcing should be able to deliver that.
Well, up to a point.
Outsourcing can certainly reduce costs, and very dramatically. Our experience is that for labour-based activities which are moved offshore (say finance processing or computer programming) savings of 30%-40% of the in-house cost in the US or Europe typically achieved. The costs will be delivered through a combination of labour arbitrage, process improvement, economies of scale and technology.
So why isn’t everyone outsourcing now?
Because outsourcing, done properly, costs money up front. The 30%-40% savings which grab the headlines are based on annual steady-state run-rate – they are real, but are not typically year 1 savings. Indeed, payback is usually around 1-2 years for a major outsource deal.
There are several main reasons. The first is that outsourcing deals are complex and require specialist commercial and legal input to make sure they are properly structured and will deliver sustainable value. This takes time and money – it typically takes 6-9 months for a client to complete the process of selecting a supplier and contracting for the outsourced service.
The second main reason is that it requires significant change to deliver the savings, and the project to deliver that change costs money. Even if a function is being moved offshore “as-is” (known in the industry as “lift and shift”) there is still a major project required to set up the delivery centre (outsourcing suppliers don’t have empty offices and spare staff hanging around), documenting the function, and transferring the knowledge. Suppliers will charge for this project, and there will also be project management costs on the client side. The suppliers’ charges may be spread over the life of the deal, but they are still a cost.
Lastly, redundancy – typically the biggest single item. As jobs are offshored or re-engineered, so the people go, and in many countries that can be expensive.
So does all this mean that outsourcing really isn’t a key tool to fight the recession? Well it wasn’t a panacea in the early days of the downturn when immediate cost saving was the focus for panic-stricken organisations. But now that the dust has settled, and organisations are looking for cost-effective delivery models for the medium term, they are likely to turn increasingly to the proven benefits of outsourcing.
This is as relevant in the Gulf as it is elsewhere. Access to skilled resources, state-of-the-art centres and leading edge technology is something organisations in the region all need, and outsourcing – whether onshore or offshore – can deliver them.
Source: http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=330365&version=1&template_id=48&parent_id=28
