81% of large UK companies to increase offshore outsourcing in the next 2-3 years

Offshore outsourcing is set for continued growth, according to the latest research by TPI, the sourcing advisory firm. The research, based on a survey of 100 senior UK executives responsible for outsourcing within large companies*, reveals that 81% plan to increase their offshore outsourcing over the next 2-3 years, while only 4% expect to decrease it.

Despite this predicted growth in outsourcing, TPI’s research also reveals that large companies choosing to “offshore” their information technology (IT) and business processes to low-cost locations, such as India and China, are increasingly doing so through wholly owned subsidiaries (“captives”) rather than external service providers. The development is just one of numerous trends, including the relocation of some offshored services and a greater diversity in viable offshore locations, which TPI concludes signify increasing maturity in the offshore outsourcing market.

Duncan Aitchison, Managing Director, International with TPI commented: “Our survey results clearly indicate that there is very little disillusionment with offshore outsourcing. What we can observe, however, is a general shift towards more sophisticated sourcing strategies as the global sourcing market comes of age.

“The growth of captives stems from companies now being more aware of how to conduct an offshore operation and less reliant on external service providers. Buyers are increasingly employing hybrid models that mix some outsourcing with some ‘do-it-yourself’ offshoring, and where external providers are engaged, it is for more complex reasons than simple cost reduction.”

To assess the growth of offshore captives, TPI compared employee numbers at the top 20 pure captive operations in India with the total number working there in IT and business process management. Their analysis reveals that the total headcount of the top 20 captives has increased by almost three quarters in the last year from 54,666 in 2003-04 to 95,225 in 2004-05. By comparison, the total number working in India in IT and business process management has increased by just a quarter over the same period. Fifteen of the FTSE 100 now have captive operations in India.

Aitchison continued: “As India is the most mature offshore location, it is a good indicator of how trends are likely to develop worldwide. There is already substantial anecdotal evidence that companies offshoring to China and Central and Eastern Europe are eschewing local service providers in favour of captives. The build-operate-transfer model is also coming into vogue, particularly in IT outsourcing, with companies using third parties to set up a development team, manage it and finally transfer it, essentially to create a new offshore IT department.”

Offshored work set to be relocated as sourcing strategies evolve

Despite being less widely used than India, Central and Eastern Europe is seen as equally appealing an outsourcing location, with both destinations rated attractive by 59% of respondents. It appears likely therefore that Central and Eastern Europe will make up ground on India’s lead over the next few years. Central and Eastern Europe are likely to be increasingly used as a location for customer facing services by those companies serving Continental European markets

China, meanwhile, is viewed as an attractive location by 41% of respondents. It is an immature outsourcing market and lacks English language skills. However, TPI reports that many large companies are establishing captive operations there, attracted by government support and a huge potential domestic market.

Other major findings of TPI’s survey research include:

* Indian providers rival Western firms on quality 60% of those that have had any significant exposure to Indian outsourcing providers believe they offer a service to rival Western providers irrespective of any cost savings.

* Failure rates in outsourcing dramatically overstated Only 4% of UK outsourcing buyers are dissatisfied with their outsourcing arrangements, while 42% are “very satisfied”. Contrary to widespread expectations, 48% even believe outsourcing has improved customer satisfaction. 64% also say that their organisation’s contingency planning has improved as a result of their outsourcing; 80% say outsourcing has improved corporate governance by clarifying responsibilities.

TPI’s research also reveals that many companies, while intending to grow their offshore operations, are readjusting the activities they base offshore. Companies are increasingly taking a global view of sourcing, separating processes out and deciding whether each one would be best based offshore, nearshore or onshore. For example, 50% of survey respondents expect to bring certain elements of their services back onshore in the next five years as part of a global sourcing strategy.

Offshore destinations in close competition for second place after India

“These results confirm our experience that outsourcing, when approached properly, is far more successful than the widely-quoted failure rates of 25%-50% suggest,” commented Aitchison.

As the outsourcing market has matured, UK outsourcing buyers have come to see a wider range of countries as viable offshore destinations. While India continues to enjoy its first mover advantage, being used by 75% of survey respondents, there is close competition for second place, between Central and Eastern Europe (28%) and China (25%).

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