Improving Business Through Offshore-Outsourcing

The world of outsourcing nowadays is getting bigger and bigger. We all know that companies from the US and UK are the first countries who outsourced their businesses outside the country or what we called as offshore outsourcing. We all know that India is still the leading outsourcing destination in the world today, followed by China and Philippines who also competing to India to the top.

The crazed of business outsourcing was tremendously uncontrollable because of the great benefits of it. I know that most of us already know why companies from the US and UK outsourced their businesses, to cut-costs, right? India and Philippines are the countries who have low costs of living, that’s why a lot of investors from US and UK decided to invest to these countries, as well as the potential competencies of these countries to boost-up their business was extremely huge.

It’s not easy to outsource your business outside the country if you have no proper outsourcing strategic plan. You should know the consequences that may possibly happen to your company before you decide to outsource. The first thing to do is of course finding the right partner who can help manage your business to improve, with a broad knowledge in business, and/or in the industry as well. After finding a right partner, and discussing your strategic plan with your partner, finding a right location for you company, to the country you have been outsource, and then finding a qualified staff.

However, a lot of investors nowadays are not just only focusing on their business to cut-costs, but also they go to countries and outsource their businesses, with a skillful workers and great competencies as well.

Hence, countries that have skillful and competitive workers are a huge advantage to lure a lot of investors to invest in their country.

Egypt: Following the Trend of IT Outsourcing

The world of outsourcing today is getting bigger and bigger. Huge IT companies around the globe are gradually hooked-up on the trend of outsourcing and are opting to outsource their businesses or services outside the country to cut-cost, as well as to achieve growth and agility.

Countries such as India, Philippines, and China are the world leaders of IT outsourcing services today. Egypt is the newest in the long line of countries that is about to set up a government agency that would focus on putting its IT services on the market and make it open to businesses overseas.

According to Amin Khaireldin, a board member of Egypt’s Information Technology Industry Development Agency (EITTDA) the country has learned a lot from India’s paradigm. He also said in his statements that they have studied the happenings in India carefully and later learned two things: that there is a need to focus on the country’s talent pool in order to keep supply ahead of demand and that it has to be made sure that there are enough reliable infrastructures”.

The Egyptian government together with representatives of the industry has approached universities to help design an IT curriculum that hopes to produce 40,000 graduates per year for the next three years who are able to work for the outsourcing industry.

The central infrastructure investments, along with the construction of a technology village near Cairo, have attracted three huge companies to outsource business processes in Egypt. The internal IT infrastructure investment has grown from $4bn (£2bn) to $12bn (£6bn) in the past three years. Consequently, rising labor costs in India have led cost-cutting outsourcers to look elsewhere.

Egypt has cut corporation tax from 42 per cent to 20 per cent and began customs reforms to improve trade. Also, a competition prize offering three startups a year worth $50,000 (£25,000) and free resources has led to a number of innovative new firms.

According to Stephen Page, Chief Executive of hardware manufacturer Sapphire, says he has been happy with his company’s recent outsourced operations in Egypt. “It has good value, good workers and not too much red tape. We have found that the infrastructure is at least as reliable as in Russia or India.”

As of now, Egypt is the 13th best outsourcing destination globally, and on average 14 per cent cheaper than India.

It is a good thing for Egypt to be receiving positive feedbacks from companies who outsource their business functions to the country. If they show continuous progress and increased competitiveness in the industry, huge companies from the US and Europe would probably decide to outsource their business functions in the country.

Outsourcing: Differences Between European and US Companies

European and US companies are competing with each other, and showing their differences on outsourcing. According to Ernst & Young’s “European Outsourcing Survey 2008”, 70% of European companies are already outsourcing at least one function of their business, with 20% set to increase their level of outsourcing in the next two years, as they increasingly view it as a means to gaining a competitive edge.

The survey is consisted of interviews with more than 100 business leaders from companies with an annual turnover more than 100M euros in France, the UK, Germany, Italy, Spain and Belgium. Moreover, the survey found the main reasons for outsourcing were cost savings (49%) and better quality through the hiring of specialists (33%). The functions usually outsourced maintenance (76%), logistics (73%) and computing/telecommunications (68%).

Companies from Belgium recorded the highest rate of outsourcing with 81%, while France recorded the lowest start rate at 63%, though they established one of the widest ranges of outsourced functions, with an average of five functions outsourced per company. Although a widespread business practice in the UK (71%), outsourcing remains limited to an average of only three functions.

European firms need to be more scalable and profitable when competing in the global economy, having to deal with a strong euro is creating a general movement towards the disintegration of the traditional vertically integrated business.

However, in the US, outsourcing is more multifaceted or complex, particularly in the manufacturing division as soaring fuel and transport costs raise concerns.

The outlay of shipping an average container from Shanghai, China, to the US eastern seaboard, as well as inland costs, has tripled since 2000 and will triple again if oil prices reach $200 per barrel as some experts predicted.

According to the survey by the National Association of Manufacturers, nearly half of North American manufacturers consider the US is the most attractive country for business growth in the next three years, and more than half expect to become more globally competitive in the next five years.

However, it may impact the fuel prices, sluggish or even reverse outsourcing in some business sectors; it will not cause a dramatic shift in the globalization of the supply chain.

The Effect of Outsourcing in US Economy

The impact of outsourcing in the US economy has evoked extensive emotions to many, especially from presidential candidates and labor groups who criticized its practice. But economists and chief executives defend it as a natural succession of the economy.

In today’s fast paced economy, it’s not new that outsourcing chased cheap labor costs around the globe for decade. But in recent years, the effort has move stealthily into higher mechanism and income brackets, and it shows no signs of slowing down.

The latest protest is fueled by the fact that some service professionals, once insulated from outsourcing, are watching their jobs head out of the country during a largely jobless recovery. It is undecided how many engineering, technical support, accounting and other professional jobs have moved offshore in the recent years. However, various industry watchers believe that 200,000 service jobs could be lost each year for the next 11 years, and that some American job seekers are concerned as well.

Although, the outlook for others is that it is an opportunity that we are just on the leading edge of a transformation of what work means around the world.

There are a number of reasons why outsourcing occurs; corporations are under constant pressure from their investors to increase profits. Going from $9.00 an hour for tech workers to 27 cents an hour for labor, has provoked corporations to overlook other costs associated with outsourcing. Bonuses are defined at the year’s end and that is long term enough for these corporations.

Another reason why outsourcing still evolves is that more and more companies are viewing the world as a global marketplace, and sometimes requires building factories within outsourced countries in order to sell products, wherein manufacturing companies also don’t want to be left behind. Almost everything in this world is moving to outsource.

The impact of outsourcing in different parts of the world today was so tremendously huge. Even though, the effect of outsourcing in the US economy is negative, still majority to the countries around the globe who have favored that outsourcing really did well for their economy.

Outsourcing: Davao City to be its new Center

Recent studies have shown that Davao shows potential to be the new Center for outsourcing. In the headline news that I’ve read yesterday, according to a research by XMG, it states that organizations in the city belonging to the business process outsourcing (BPO) industry are expected to lead the development of the area as a robust technology hub.

XMG added, citing a study it conducted between January to March 2008, saying that outsourcing vendors who participated in the survey are very bullish about Davao City, primarily due to the area’s larger population of untapped qualified resources compared to Cebu City in the Visayas.

The study highlighted that competition in Cebu City is nearing saturation as the talent ramp-up continues.

The study also highlighted the population of Davao City as considerably higher than other Tier-2 offshoring cities globally. In the Philippine context, Davao City’s population is 71% higher than Cebu City, 499% larger than Olongapo-Subic City, 333% higher than the Angeles-Clark area, and 340% larger than Baguio City.

“The city’s estimated workforce is twice of Cebu, 9 times of Subic, and 7 times of Clark, and 6 times of Baguio. This has not even taken to account the manpower pool at the nearby cities and provinces of Davao City,” the company said.

According to the study, Davao City has various educational institutions annually yielding a higher number of IT and BPO qualified graduates than Subic, Clark, and Baguio by 689%, 278%, and 40% respectively.

Wow, this is really good news for all davaoeño wannabes who want to be part of the IT outsourcing companies in the region. This is also an over whelming experience to be a center of outsourcing industry, and overcoming the top outsourcing center, which is the Visayan region.

But the question in my mind is the city well prepared for asserting as a viable alternative information technology hub three years from now?

Pharmaceutical Industry Hooked Up by the Outsourcing Boom

The pharmaceutical industry has been slower than other sectors to adopt outsourcing, largely due to concerns over protecting valuable intellectual property. Rising costs and decreasing margins are leading more pharmacy companies to outsource.

According to an Outsourcing-Pharma.com., ten of the largest pharmacy companies, and four of those, have announced major initiatives to outsource manufacturing activities last year. The announcement identifies the increase as one of the top 10 strategic issues currently facing the pharmacy industry.

This transition towards outsourcing of manufacturing is likely to be followed by other functions within pharmaceutical companies, including some elements of R&D.

Actually, the movement of pharmacy R&D offshore already appears to be happening.

The continuous increase of outsourcing may help pharmacy companies gain business benefits other than cost reductions; this includes faster time-to-market for new products, entry into emerging markets, and an enhanced focus on brand-building activities.

Of course, a due amount of risks is present, that’s always a common factor in outsourcing. While pharmaceutical companies appear less concerned than before about the loss of intellectual property, it could well come back to haunt major pharmaceutical companies as the true cost and complexity of manufacturing becomes transparent. It’s also possible that contract manufacturers could develop enough expertise to compete head-to-head with former clients.

Though it’s not likely a direct concern of the pharmaceutical companies because removing jobs from the U.S. and Europe will affect those economies. Pharmacy accounts for 640,000 jobs in the European Union, including 100,000 in R&D, and a €34 billion (U.S. $53.4 billion) trade surplus. Because pharmacy drives so much economic activity, regulators may possibly attract their attention by outsourcing industry.

Outsourcing: Come and Gone

Large firms that have fueled the global Information Technology outsourcing boom and have put developing countries such as the Philippines on investors’ radar screens are getting picky. “We do believe that the boom years for IT outsourcing growth have come and gone”.

Nowadays, buyers are getting more selective and strategic in the way they approach outsourcing and, as such, the pace of growth is slowing. Buyers are still prematurely terminating contracts, and questioning the value of outsourcing. They are also struggling with the basics of determining what to outsource, measuring effectiveness and managing a global pool of resources.

Buyers are concerned about contract renegotiations, extensions, and terminations to seek additional outsourcing opportunities. In 2006, 8 percent of offshore buyers said they plan to decrease their levels of outsourcing over the next 12 months.

Firms are reining in outsourcing for three reasons:

-Either they mistakenly outsourced a process or function that is core to their business and are now bringing those back in.

-Their provider over-promised and under-delivered.

-The complexity of managing and measuring outsourcing projects and relationships overshadowed the benefits.

This however does not signal the death knell for IT outsourcing. The industry is alive and will continue to grow well into the future, although at a slower pace.

If this situation continues, maybe this will be the end of offshore outsourcing because it lessens the quality of IT outsourcing rate to all buyers.

Offshore Outsourcing Grows, Automation key to Cost Cutting

According to Gartner Research, U.S. companies will increase the amount of work they outsource and in the next 10 years it will send overseas, but the type of work and how the work gets done will change.

The research firm is set to release this week the findings at its “Outsourcing & Vendor Management Summit” in Washington, D.C. The findings showed that by 2011 core outsourcing and external services will become the largest IT market spend, at more than 30% inching out spending on Telco costs. Gartner also forecasts that the offshore delivery model for IT services will increase in the coming years as U.S. companies look to further reduced costs. Today 15% of IT services use the offshore model. In 2013, 25% of outsourced services will be offshored and by 2018 that number will jump to 40%, the firm predicts.

Gartner states that,” Using staff in lower-labor-cost locations can decrease costs and provide access to different labor pools in terms of access to talents”. “Buyers looking to maximize cost reduction will need to embrace greater levels of non domestic delivery.”

But according to Robert Brown, research vice president covering outsourcing and IT services at Gartner, the true mechanism that will drop the costs of, say, business process outsourcing (BPO), will be the increased use of automation technology to complete human-intensive tasks. Today about 90% of the processes outsourced are completed manually, showing that automation has increased 5% since 1998. Gartner predicts by 2013, 35% of the processes will be automated, and in 2018, there will be a “huge and fast shift to automation” with 55% of processes being automated.

Gartner adds that, about 10% of the total available market today embraces BPO, and while the market will grow, it is not going to grow exponentially by 2018. Gartner forecasts that by then there will be 25% market penetration for BPO, and companies still are not comfortable outsourcing or offshoring business processes, even though many lend themselves well to the model. For example, hiring and recruiting, payroll and other HR business processes are a good fit for outsourcing and the automation that will deliver bigger cost savings.

“When you offshore a business process, you are fundamentally offshoring a human-intensive task,” Brown says. “The cost savings can be enormous, if you can then automate the task. The automation part of the story will probably hide the cost savings we have seen so far in outsourcing.”

Top 30 Offshore Outsourcing Locations According to Gartner Research Institute

Gartner Research Institute thinned down the world’s top countries that offer the best locations for offshore services.

Tuesday- the mentioned research firm released its Top 30 Leading Locations for Offshore Services of 2008. According to the results, India might not be the only country when considering outsourcing work overseas. Countries such as Argentina, South Africa and New Zealand could take some of the spotlight off India as the offshore industry darling; although India remains to be in the list of the leading outsourcing locations.

The location selection is a key factor that companies need to consider when sending work overseas, Gartner says; and the city they choose will impact the success of the offshore engagement.

“Whether you have a country-led or vendor-led approach to offshore services, you must understand the offshore location landscape,” according to a presentation by Gartner research vice president Ian Marriott.

This is a great opportunity for the countries mentioned by Gartner, to improve their economies more.

Gartner evaluated 30 countries in three world regions that could address enterprise companies’ outsourcing needs. Considering 10 key criteria, Gartner scored the potential of numerous cities to provide the right mix of English language proficiency, local government support, infrastructure and technical considerations, such as data security and privacy. The research firm released the data at its Outsourcing & Vendor Management Summit in Washington, D.C., this week.

Who Really Benefit in Offshore Outsourcing?

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Most of us know what offshore outsourcing is. Offshore outsourcing is also called as a type of business process outsourcing (BPO), is the exporting of IT-related work from the United States and other developed countries to areas of the world where there is both political stability and lower labor costs or tax savings.

I recently read the article from McKinsey Institute, says that the savings enjoyed by companies that move labor-intensive service industry work from the United States to countries with lower labor costs have triggered an mass departure of US business-processing jobs.

Some analysts project that by 2015 roughly 3.3 million of them will have moved abroad. This prospect has prompted calls for the government to restrict offshoring. But they overlook the benefits that build up to the US economy from it.

This is a really mass destruction for the US economy because of this issue that they have been experiencing right now. This is also a good news for countries that really dominating in offshore outsourcing as well, especially India and Philippines.

A study by the McKinsey Global Institute details the wide positive economic benefits to the US economy from offshoring.

Beyond Offshoring

Companies that send their back-office jobs offshore often cut their labor costs by as much as half. But new research by the McKinsey Global Institute finds that these companies risk leaving billions of dollars in savings behind if they just replicate what they do at home in countries where labor is cheap.

The savviest operators redesign business processes to use automation and take full advantage of the new environment’s potential.

Transforming business processes as part of a strategy to offshore back-office functions can release huge new revenue opportunities even more valuable than the obvious labor cost savings that come with offshoring.