Outsourcing: Thriving at Home and Abroad

Cities from Boise to Gdansk benefit as economic and political pressures prompt companies to outsource work to lower-cost cities at home and overseas

By Mark Scott

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In spite of the troubled global economy—or more likely, because of it—one of the few business sectors that continues to thrive is outsourcing. No wonder: Companies looking to cut expenses in the face of soft demand are keener than ever to hand off parts of their operations to lower-cost providers. As a result, outfits providing everything from third-party customer support and information technology services to back-office processing saw revenues grow last year by an average of 13% and expanded their workforces by 18%, according to the International Association of Outsourcing Professionals.

Of course, that's no comfort to the millions of people in developed countries who are out of work. But it does mean that major outsourcing providers, from IBM (IBM) and Capgemini (CAPP.PA) to Indian giants like Wipro (WIT) and Infosys (INFY), are surviving the recession better than many companies.

The economic situation also is reshaping outsourcing itself. Widespread layoffs in the West—especially in the U.S.—have flooded the labor market with highly skilled workers who are eager for jobs and often willing to accept lower pay. That's prompting global outsourcing providers to beef up their presence in the U.S., where they can scoop up local talent and offer services for far less than they could have two years ago.

politically explosive

Also driving U.S. growth in outsourcing services: Rising costs in traditional Indian destinations such as Bangalore and Mumbai make second-tier U.S. cities like Indianapolis and Boise, Idaho, relatively more price-competitive than in the past. "Many countries and cities are trying to get on the Indian [outsourcing] bandwagon," says Graham Pascoe, an advisory partner at consultants PricewaterhouseCoopers (PWC) in London.

The net effect, Pascoe says, will be broader choices among outsourcing locales and a move to more—and smaller—contracts. In the past 12 months, he notes, outsourcing deals already have fallen on average by 5% to 10% in value. "The credit crunch will accelerate outsourcing, but the economics of deals will be structured in a different way," Pascoe concludes.

There's another factor, too, that's altering decision-making about outsourcing. Sending work overseas already was controversial when times were good; now, in the face of widespread unemployment, it has the potential to be explosive. "Offshoring can be an emotive and fractious topic," says Shashank Tripathi, director of the outsourcing advisory service at consultancy Deloitte in London. "Locally focused companies without past [outsourcing] knowledge don't want to experiment when the economy isn't at its best."

Tata in Indianapolis

As a result, Tripathi says, companies lacking experience with outsourcing will likely steer clear of it for now, even if that means swallowing higher costs in the short term. And even firms with established offshore operations are taking a more nuanced approach. That often includes relocating customer-focused operations back home, while maintaining back-office services in cheaper countries.

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