Outsourcing Statistics

Summary

The global economic trends continually reshape the outsourcing industry landscape. The past decades have witnessed the expansion of outsourcing, and it is forecasted to expand further over the coming years. IT companies represent the most active areas in the industry, and there are questions that can be raised. What is the share on cost for IT spending devoted for outsourcing? What outsourcing services compose the largest area?

There is an active competition amongst players all across the globe. Being one of the pioneering and major global stakeholders in outsourcing, India continues to act as the leader. But will there be a role shift in the near or distant future as other participants are improving while others regress based on industry performance? To answer these questions, it will be useful for us to examine some of the figures at hand.

IT as the most active area in outsourcing

As the reasons for outsourcing continue to evolve (e.g. various services that can be outsourced), improvement of operational flexibility, cost reduction, rapid deployment of new capabilities, increase in service levels or reduction of management overhead drive organizations to turn to outsourcing.

IT is the most active area in outsourcing (see figure at the right). Outsourcing opened a gate of opportunity for IT companies as they face shortages of e-business application development skills and narrowing of time-to-delivery requirements, which were brought about by a drastic change in the sourcing arrangements. By taking advantage of the increasing number of sourcing options, IT groups can now focus on building their organizations’ revenue-generation aspects (OffshoreITOutsourcing, 2007). Image Source: OffshoreITOutsourcing.com

Spending on outsourcing is pegged at 7.1% from the total IT spending. This figure remained   unchanged from the prior year based on the study conducted by Computer Economics in 2011 (IT Statistics 2011/2012), which measured IT outsourcing activities. The study further includes some of their major findings:

• During the recession, spending on outsourcing as a percentage of total IT spending rose as IT executives wrestled with hiring freezes and the need for flexibility. This year, the data suggests the rise in spending on outsourcing paused or, more accurately, came into alignment with IT spending in general.

• The use of Software-as-a-Service continues to gain strength, making application hosting one of the fastest-growing areas for outsourcing.  While the amount of the typical portfolio being hosted by outside parties remains low, application hosting is the most frequently outsourced service in the study. Moreover, half of all organizations that use hosted applications are planning to increase their use of these services. Help desk has the second strongest trend line, but in contrast to application hosting, the frequency of help desk outsourcing is relatively low.

• The three most strongly adopted outsourcing services are web/e-commerce systems, application development, and application maintenance. These functions rank high in both the number of organizations that outsource them and the amount of work typically outsourced.

• The IT function with the greatest potential for reducing costs through outsourcing is help desk. Fifty-one percent of organizations that outsource this function find that they have lower costs than when they performed the function in-house. Desktop support andapplication maintenance also rank high in cost-savings success.

• The function that holds the greatest potential for improving service through outsourcing is IT security, followed by disaster recovery. Only 6% and 8% of IT organizations, respectively, find outsourcing these functions makes service worse.

• When considering the potential for successful service and cost experiences with outsourcing, four IT functions stand out: application maintenance, application hosting, data center operations, and network operations.

Top Outsourcing Locations

Using the country rankings based on Global Services Location Index, India remains the global leader in outsourcing, followed by China and Malaysia. The GSLI 2011 ranks countries based on their attractiveness across IT, BPO and voice work.  Surveys were conducted to rank 50 countries that were selected on the basis of corporate input, current remote services activity and government initiatives to promote the sector. These countries were tested against 39 measures across three major categories: financial attractiveness, people skills and availability and business environment (see figure below for country ranking):

Since the inception of the Index, the top three countries consistently remained in their respective positions. Main reasons to explain their staying power are the rich resource of talent pools and cost advantages. According to A.T. Kearney (2011) wage changes and currency shifts from the financial crisis, have led to major changes in other rankings within the Index (see figure below).

What account for the changes in the ranks? The United Kingdom advanced 15 notches above its original position due to fall of the pound’s value coupled with slowing wage increases. Mexico, which ranks 6^th place, now gains supremacy in Latin America region due to currency depreciation and increased nearshoring sentiment in the United States. Middle East countries like Egypt moved forward to 4^th as it improved the basic elements of the industry, while the United Arab Emirates (UAE), progressed from rank 29^th to 15^th due to its service sector performing more competitively albeit the tempering of its growth brought about by the financial crisis.

Industry outsourcing activities in the Top 10 countries

India stands most prominently as most competitive across the three major industry activities among the top ten countries in the survey. Surpassing in all fields of offshore services, it excels in IT as it is graced by elite educational institutions. Its strength also lies in the annual output of qualified graduates capable to meet the needs of the BPO industry. The English proficiency of its population further supplements India’s power to compete in voice services. The Philippines also demonstrates relative well-roundedness as well. With more than a decade in improving its capabilities, the country has now moved into ITO from being primarily a contact-center hub.

According to A.T. Kearney (2011), success is determined by identifying a niche. China, while ranking second in the Index has mixed capabilities in terms of industry activity. China has been steadfastly strong in IT, and BPO work has seen significant improvement. However, voice work in non-Chinese language is almost non-existent with the exception of few Japanese contact centers located in northeastern part of the country.

IT dominates as the most active outsource services, while companies take advantage of this opportunity to focus on improving revenues. While this is the case, buyers of services need to be aware that outsourcing expands to other services as well, and these services are available from a wide range of locations globally.  The caveat here is that it is imperative for buyers to   also understand that different countries differ in terms of specialization in particular services. The data presented may serve as your start-up point to analyzing the market further before you decide to invest at a particular location for a particular service.