The undisputed facts about outsourcing, Part 8: Industries experiencing secular change have more aggressive outsourcing plans

Our recent State of Outsourcing study, conducted with the Outsourcing Unit at the London School of Economics, has been uncovering many home-truths about why some industries are more motivated than others to externalize their support operations to third-parties.  

However, one factor that is continuously being reinforced, is that those organizations being impacted by radical, fundamental shifts to their very industry economics, are more prepared than ever to admit they need to look outside of their current organization boundaries to keep their business operations cost-competitive.  Simply-put, secular change crystallizes options for businesses and the outsourcing planning process often becomes more clear-cut as a result.

Buyers today are figuring out where to focus their outsourcing plans to benefit the core business

Increasingly, we are seeing a realization that retaining some processes internally isn’t – in any shape of form – bringing organizations a competitive edge, and these sourcing decisions are no longer only about cost – they represent a fundamental change in the way business leaders now view outsourcing as an integral function of their operations.  For example, does a bank lead its market because it processes mortgage applications better than its competitors?  Or would its management rather find someone else to process them at lower cost, using industry-standard process flows and technology, while they focus internal competency on business functions that can help them gain marketshare, such as smarter customer targeting, or  upselling new product through customer support channels etc.  And does a retailer really need to maintain its entire application portfolio inhouse, when it can devote its internal talent and IT resources to improving its customers’ online shopping experience, where it can actually grow its business?

Today’s buyers are getting a lot smarter at figuring out how they can improve their organizations by using the resources and knowledge available through third-party relationships.  Examining plans to outsource over the next three years reinforces this mind-shift:

The Secular-Shifters: Gearing up with long-term aggressive outsourcing strategies

 The five most bullish industries planing significant increases with outsourcing, are not only basing their planning on their proven, ongoing cost-reduction outcomes (see Part I), but also because the fundamentals of their industries have dramatically shifted in the recent past, for example:

  • Entertainment, media and publishing: The crash of newspapers and network news; The Web 2.0 impact; Radical new distribution and business models.
  • Software and Hi-Tech: Rapid commodotization of packaged software models; Impact of Cloud computing on licensing and pricing dynamics; Dominance of India, China and other low-cost nations to drive out the cost of development;  Willingness to “Eat their own dog-food” as providers of outsourced services themselves.
  • Energy & Chemicals: High price volatility for oil products; high capital costs of oil exploration projects;  Shortages of talent;  Aging infrastructure and constantly-changing compliance requirements.
  • Banks: Massive de-leveraging; Re-regulation; Unprecedented debt/credit pressures.
  • Insurance: New compliance measures (Solvency II, ObamaCare) causing unprecedented administrative cost and workload; Shortage of risk analysts and actuaries to take on the higher level work.

There are just a few examples of major industries, being shaken to their very foundations, where we can reel off secular shifts driving unprecedented demands on organizations to remain profitable. Is it any coincidence that it’s these industries that are today being the most aggressive with embracing third-parties to redefine their global operations?  Secular changes drive bolder, more radical behaviours, and it’s already clear that a more aggressive approach to outsourcing is high on these organizations’ agendas.

The Penny Businesses: Living month-to-month

Industries such as retail and manufacturing, one can argue, have already been through their secular shifts over the last three decades or more.  While they have had to experience much fundamental change, for example mass globalization of markets and volatile changes to consumer spending behaviors, the very essence of these industries is still the same – their organizations are focused on inventory management and supply chain optimization, maintaining operating margins and accurately predicting demand. To them, outsourcing has always been an option, and has been readily explored over the years to find more pennies to save. Hence, it’s no surprise that these organizations are more conservative with their long-term operational planning.  Moreover, these businesses are typically reactive to market conditions and often radical long-termism doesn’t fit as well with their mentality, especially when faced with uncertain times ahead. In addition, many of them have already shaved their operating costs to the bone, hence digging out new productivity benefits via outsourcing is often challenging – and mistakes can prove fatal in a low-margin business. While heavy outsourcing adopters in the past, we expect these sectors to remain focused on outsourcing, but with a large proportion opting for a more reserved approach.

The Public Sector: Facing up to unprecedented challenges

One industry which is going through more secular change than any today is the Public Sector.  Quite simply, national and local government bodies are under unprecedented pressures to drive austerity measures and make long-term plans to drive new productivity programs.  This explains why 55% of public sector bodies actually foresee some moderate increase in outsourcing activity over the long-haul.  Huge political bodies, such as the US Navy, NASA, the UK Inland Revenue and National Health Service – and even the FBI – all outsource elements of their operational support functions to varying degrees. With increased onshore delivery resources becoming available from several providers, this could well turn out to be a surprisingly large growth sector for outsourcing.

The Bottom-line: New fundamentals are creating new rules, and outsourcing could be a significant beneficiary

Outsourcing would appear to be entering a new era – one where organizations can no longer afford to ignore its benefits.  Moreover, as these radical and secular changes to many of our core industries take hold, business leaders simply cannot  overlook the competitive advantage outsourcing offers: enabling them to focus on developing competitive advantage.  These secular shifts are threatening the survival of many businesses, but at the same time are opening up major opportunities to build smarter, more globalized and leaner organizations. As we venture into unprecedented times of uncertainty  that are bringing new challenges, business leaders can no longer afford to cling to many of the methods of yesteryear to steer their organizations, and this data points to a more bold, radical approach to embrace the benefits of global sourcing.

Bookmark the permalink | Leave a trackback: Trackback URL

6 Comments

  1. Jim Walsh
    Posted August 30, 2011 at 8:33 am | Permalink

    An interesting installment in this series. Regarding the section titled ‘Penny Businesses’, I agree that businesses within these sectors have already been utilizing outsourcing for several years. They are also businesses that have tended to focus almost solely on the cost saving aspect of outsourcing, are businesses that tend to grow via acquisition, and are businesses that, due to the pressures of their sectors, have tended to put off many investments. While they are predominantly indicating that they will remain at the same level or increase only moderately, did you see any indication of change regarding how they planned to spend those static outsourcing investments, whether they would begin to focus on collaboration and innovation and less on pure cost control?

  2. Posted August 30, 2011 at 10:28 am | Permalink

    @Jim: this sector overwhelmingly has cost-reduction (more than any other industry) as its prime driver for outsourcing (96% for CPG/Mnfct and 86% Retail / Hospitality). However, there is a marked move towards leveraging outsourcing to develop more effective global operations. The major investment focus is skewed much more towards procurement / sourcing and finance effectiveness than anything strategic with IT (very much a “lights on” approach). Overall, I would anticipate a continued stance towards rigid cost-control, but a lot more focus on investigating better opportunities for optimizing their global supply chains, and this could well include more collaborative sourcing partnerships which include shared resources and logistics. For example, we recently discussed an initiative whereby two mobile handset manufacturers were interested in sharing distribution and warehousing facilities. They saw little competitive edge to be gained “owning” this specific area of the supply chain. We are also seeing similar moves taking place in other manufacturing and CPG industries,

    PF

  3. Alain Schaeffer
    Posted August 30, 2011 at 11:57 am | Permalink

    This is one of the most informative articles on outsourcing I have read for some time. Seems like we are clearly moving into a new era for outsourcing, where firms are focusing on the “how to innovate” as opposed to only “how to reduce costs”.

    Kudos for a great piece of analysis,

    Alain

  4. Vince Turner
    Posted August 30, 2011 at 2:10 pm | Permalink

    To add to Jim’s comments, it’s frustrating why the consumer space has been so negative with its focus on cost reduction and little else. It seems to be the nature of the beast with those firms – all about making the quarterly numbers at all costs, with little eye on the bigger picture beyond that. It wouldn’t surprise me if providers start to focus more on other industries – like the ones you mention – which offer them more room to develop deeper footprints, and engagement that can move beyond simple labor-savings,

    Vince Turner

  5. Posted September 12, 2011 at 8:22 am | Permalink

    The survey question is interesting – It’s asking the buyers about the propensity to outsource “General & administrative functions” as against “IT, Engineering, HR, Finance etc”.

    Would the responses have been different if the question would have dropped the reference to “General and admin functions”?

    There are indeed secular changes in manufacturing (re-alignment of points of production in favor of emerging markets) and retail (fragile consumer confidence and a strong shift from “spending” to “saving” mindset), hospitality (Less travel, flat occupancy, new business models).

    I am not sure how to reason out, the response of buyers from these industries, as these sectors continue to notch up healthy outsourcing CAGR for the offshore service providers.Perhaps they are running at optimal outsourcing levels already, w.r.t admin functions?

  6. Posted October 12, 2011 at 12:09 pm | Permalink

    I agree with the later comments that there is a problem with the Retail and Manufacturing Industries pushing towards lower costs. As was stated in an earlier post last month, this just leads to a never ending spiral of low cost and inefficient providers that end up hurting companies in the long run.

    At MetaSource we’ve definitely seen a shift in the attitude of our clients in different industries, and not suprisingly, we have found companies in the heavy regulated industries to be looking for actual partners that can help them innovate and become compliant with all the changes and overall that is happening.

    Great piece Phil, really love the analysis and information.

2 Trackbacks

  1. [...] Great outsourcing report from HFS team on the impetus to outsource being greatest in industries experience the maximum change.  http://www.horsesforsources.com/facts-about-outsourcing-part-8_082911 [...]

Post a Comment

Your email is never published nor shared.