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Outsourcing's No Longer In

Outsourcing's No Longer In

Outsourcing has fallen on hard times, just like almost every other sector of the global economy. However, that's because so many companies must take drastic cost-cutting measures, not because outsourcing has lost its attractiveness as a tool. There's likely to be a great deal of pent-up demand when the economy improves, said Kevin Keith, director of business development at the Robinson Group.

By Maria Verlengia
06/30/09 4:00 AM PT

In the past, companies with tight budgets frequently turned to outsourcing during tough financial times. The current global recession, however, has curtailed outsourcing as much as it has other parts of the economy.

"Oddly enough, the global recession has hurt outsourcing significantly," said Chad Hahn, principal owner of Hahn Consulting and CEO of Square One Solutions.

"In an environment where there is tremendous pressure to cut costs amid falling revenue, you would think that companies would try to outsource more to keep costs in check. The reality is that companies have cut outsourcing along with all the other expenses in their business," Hahn told CRM Buyer.

"The recession means a lot of people are out of work," Kevin Keith, director of business development for the Robinson Group, told CRM Buyer. All business is down, including outsourcing, and rates have dropped as well. The economic crisis hit banks and financial companies especially hard, said Keith.

For years, Keith struggled to find qualified people to fill roles. Now, however, the challege is finding work for good candidates. Even recruiters are out of jobs today because no one is hiring, he pointed out.

The slowdown has affected the entire outsourcing process. Even when companies decide to hire, they do so very cautiously.

"The deal cycle has gotten longer," Gary M. Zeiss, an attorney who specializes in the legal aspects of outsourcing, told CRM Buyer. "The deal cycles are extraordinarily slow. People are trying to renegotiate deals."

Pressure to reduce costs, insecurity and instability in the market are to blame, according to Zeiss.

Instead of trying to grow, companies are trying to shrink, he said, pointing to cuts in manufacturing, the legal industry and IT.

Signs of Life

Some industries are showing signs of life, said Robinson Group's Keith. Pharmaceutical and insurance companies remain viable and active.

There's higher activity in the travel industry and in the call center industry, noted Zeiss.

Customer service is still being outsourced because it is a cost. Companies with "large customer service footprints," like the travel industry, are more likely to outsource, he explained.

Hot Spots

Asian countries continue to be the hot spots for offshore outsourcing. Mexico remains popular for nearshore outsourcing.

"I still think India is one of the prime locations for outsourcing," said consultant Hahn. Even after the Satyam debacle, India is still more attractive than other countries because of its large pool of English-speaking resources and relatively good relations with the U.S."

India, China and the Phillipines are all outsourcing hot spots, commented Keith.

"Russia and the Ukraine territories are coming on strong now also," he added.

Entrepreneur Lee Blaylock founded WhoDoYouKnowAt, which offers a private business networking platform, in 2008. He outsourced development of the application logic extensively to India.

For people-intensive businesses, outsourcing makes sense whenever there's a cost advantage, Blaylock told CRM Buyer.

"The economy has made me smarter about how I sourced my labor," he said.

Outsourcing comes in a variety of forms, and Blaylock became familiar with many of them, including dual shore, nearshore, and rural shore.

India and Russia are the big IT outsourcing hot spots -- even more so than China. That's a consequence of cultural differences, he noted.

Rural-shoring spots include West Virginia, Idaho and Alabama, said Blaylock. Often, rural-shoring companies position themselves near solid engineering colleges for ready access to the labor pool produced by the schools.

India and China will continue to be forces to be reckoned with, in Blaylock's view, because of the sheer size of the population.

"It's going to be harder for [the U.S.] to compete," he remarked.

However, even countries traditionally strong in outsourcing have been affected by the global recession," attorney Zeiss pointed out. Southeast Asian companies tend to put on a positive front, but they are also experiencing a slowdown, as is Europe.

"Europe's got it worse than we do," he said.

Type of Work Outsourced

In the case of the U.S., "we outsource about 70 percent of our programming and software testing work," said consultant Hahn. "We find these services are easily translated to an offshore team, and it is work they're comfortable doing. We don't outsource software architecting, graphic design, or business analysis work -- all of these tasks are handled internally," said Hahn.

Among the disciplines that are kept in-house are business analysis, project management, architectural layout, technical writing, and other front-end disciplines, observed Robinson Group's Keith. Coding, validation, and testing are done by third-party vendors, usually outside the U.S.

Other operations that tend to stay in-house are business intelligence and data warehousing, he said, because higher interaction is needed with users.

The Future of Outsourcing

Although outsourcing is now slow, the next nine months to a year will see a huge response to pent-up demand, particularly in the healthcare industry, predicted Keith.

"Obama has stated many times that he wants to revamp the healthcare industry," Keith said. "When Obama talks, people listen." This will mean a greater need to ensure data is secure and will likely involve more regulation, said Keith. The sector will become more standarized.

In addition, stimulus spending on infrastructure Visit the VMware Tech Center projects such as roads, bridges and buildings will create demand for IT outsourcing, he noted, particularly for project management software companies. Government projects will also create a demand for software.

Taking a more cautious view of the economic stimulus package, Zeiss pointed out that it may not necessarily stimulate outsourcing because the stimulus money could come with strings attached. For example, any provisions that the money be spent only in the U.S. could discourage offshore outsourcing.

"I have both hopes and fears," Zeiss said. On the positive side, he expressed hope that outsourcing will grow organically with the economy and also help the economy grow.

However, the opposite could happen. Companies may not start hiring. The recovery will depend on the insight and foresight of leaders, he said.

Still, whatever form it might take, outsourcing is here to stay, and that's a good thing, according to WhoDoYouKnowAt's Blaylock, who sees it as a way of saving jobs and growing businesses.

"The trend is not going away," he said.

"I don't think it's limited to specific types of companies," agreed Hahn. "If you're a business owner in today's global economy, outsourcing is a fact of life that must be embraced."


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