A study predicts new and renewed deals as the economy emerges from its doldrums.

 
By Debbie Bolla
 
 
Low-cost offerings and minimal upfront investment are two factors that will be integral to driving new and renewed outsourcing deals, according to a recent study by AMR Research. Entitled “State of the Outsourcing Industry in Mid-2009,” the study anticipated modest growth in Q3 of 2009 with a spike in new and existing contracts in Q4 of 2009 and Q1 of 2010. For HRO, 22 percent of enterprise-sized companies are likely to increase their outsourcing engagement, and 12 percent are likely to start outsourcing. In the mid-market, 18 percent plan to increase their offerings, and only two percent are considering adding outsourcing to their business plan.
 
The Appeal of Outsourcing
The study provided significant detail as to why enterprise ($3 billion or more revenue) and mid-market companies ($750 million-to-$3 billion) are considering or have already decided to expand their outsourcing deals:
 
Globalization. The recession has offered many lessons, and one of the most important is the extent of integration between global companies and markets. Trend reports show that future outsourcing engagements are likely to be global in nature. Organizations agree: 60 percent of enterprise companies felt that globalization was a very important factor in their decision-making process.
 
Cost reduction. A McKinsey study found that 70 percent of consulting engagements are focused on cost reduction, and only 30 percent are looking for revenue generation. Companies see outsourcing as a vehicle for driving out expense from the bottom line. Seventy-eight percent of enterprise organizations and 77 percent of mid-market companies cited decreasing operating costs as a main reason to outsource.
 
Re-engineering business process. More than half—54 percent—of large enterprises see outsourcing as an opportunity to revitalize their business structure. Firms have trimmed the fat and streamlined poor processes. This has put them in the position to move into an outsourced environment that is underpinned by robust ERP and standardized processes.
 
Leveraging outside expertise. Forty-five percent of mid-size companies cited access to new skills as important. These companies are looking to move into broader-managed service agreements to gain better and more cost-effective access to application development and support skills. This provides the platform to develop long-term relationships with service providers as well as leverage existing staff.
 
The study also found factors that are inhibiting both levels of companies from signing on the dotted line: upfront transformation costs (32 percent of mid-market, 39 percent of enterprise); disruption to organization (37 percent of mid-market, 36 percent of enterprise); and overall business uncertainty (17 percent of mid-market, 23 percent of enterprise).
 
What’s Next?
As the global economy slowly comes out of the recession, companies are focusing on the bottom line and on cost containment. Outsourcing is a possible solution, but it needs to be combined with ongoing business transformation initiatives. Outsourcing is expected to make a comeback with double-digit growth—it already has in some cases. The study is forecasting smaller scope engagements focused on lower upfront capital expenditure and supported by low-cost offshore and nearshore resources.