Will Outsourcing Be Dried Up By 2022?

According to the Economist, quoting the Hackett Group, this is a distinct possibility. But is this simply because the increase of technology and automation will mitigate the need for human FTEs, or because outsourcing and offshoring are becoming so much a part of normal business strategy?

The Economist, in a recent special report on outsourcing and offshoring argued that, for the past few years, companies have been forced to re-examine the merits of each as they find they are not able to reap the benefits they once were able to.

There are three key reasons for the slowing of the outsourcing market according to Tazmin Booth of the Economist. Firstly, in terms of the broader management of a company, some things are better when kept geographically closer together. Locating manufacturing near to research and development, for example, can positively influence innovation. Secondly, the increasing prevalence and sophistication of automation technologies means that you need not employ staff for the more manual and repetitive tasks. Thirdly, and crucially, the global labour arbitrage – i.e. the gap in wages between rich nations and the developing world – is slowly disappearing.

This is particularly the case in China, which during the outsourcing boom, became known as the world’s workshop. We became used to the seemingly limitless low-cost labour resource, but following the “stampede” of western companies outsourcing their manufacturing there, competition has increased thus pushing wages up. When you factor in the increasing cost of shipping too, Booth predicts that the cost of manufacturing in China will be on a par with manufacturing in North America by as soon as 2015. Booth also warns that while there are other low cost locations to choose from, such as Thailand and the Philippines, these labour markets cannot replace China’s in terms of supply chain and general infrastructure.

Meanwhile, a survey conducted by Horses for Sources in association with KPMG reveals that over 50% of 1,355 respondents are planning to increase their outsourcing of application services, just under half their finance and accounting, and a third their HR function. They also noted an increase in newer outsourced areas, such as analytics and legal.

So where does this leave outsourcing?

There has been a drastic change in attitude by companies to outsourcing and offshoring. Increasingly, the more complex services such as analysis and accounting are removed from the main business.

“The more important development is that companies are rethinking services outsourcing to some degree, and there’s no doubt that the outsourcing of services are still in full swing. There are hundreds of thousands of jobs still going each year… but the vast majority of jobs that can go in services have gone already”

Traditionally we have viewed outsourcing and offshoring as strategic movements only for the low cost, highly manual and easy to automate processes. Today, the focus has shifted. By looking for alternative sourcing and partnership opportunities as an integrated part of the business strategy, companies can take advantage of the increasingly borderless economy.  

As Phil Fersht of Horses for Sources commented, “the focus shifts to how enterprises can evolve into a globally sources environment, not simply the should”.