Time to Cast Deeper Nets When Making Global Sourcing Predictions

Tracking the global outsourcing industry is something akin to regulating commercial tuna fishing.  Ask any of the five international fishery management bodies to tell you the size of the worldwide tuna population, and you’re likely to get five different answers.  That’s because there are over 50 species of tuna, varying in size and domicile dispersed across most of the world’s oceans.  And like tuna, outsourcing deals are plentiful, diverse in size and function, and widely distributed throughout the globe.  This makes forecasting especially tough work for research advisory firms like Ovum and Everest that often depend on company press releases for their deal tracking data.  Press releases catch the big fish, but what about the deals slipping through our nets?  If we want to understand the future direction of the outsourcing industry, we should also cast deeper nets and pay closer attention to what’s happening with domestic outsourcing deals in China, India, Brazil and other emerging economies.   

The pervasive and often subversive nature of the outsourcing industry makes it difficult to track.  Most customers (particularly North American and European customers) are camera shy, preferring to stay out of the business & popular media spotlight.  Only when deals get too big to push under the public relations boat, do we discover outsourcing mega arrangements like IBM’s recent 1billion dollar partnership with Mexican cement maker Cemex.

So when making forecasts, the research community typically looks at company press releases from publicly-traded companies. These companies have a responsibility to stakeholders to report on any major operational changes.  These companies also tend to be American or European so naturally our perspective on the future of the outsourcing industry is based on the trends occurring in mainstream channels.   

But what about domestic outsourcing deals in places like China and India?  We rarely hear the details about how these markets are adopting outsourcing into common business practice.  One recent example of this western-centric perspective is the Everest Group Q2 2012 Market Vista report that noted “the pace of growth [global outsourcing] is slowing down partly because of the debt crisis in Europe; the number of contracts has been sliding for some time now”.  This may be true for U.S. and European firms outsourcing to eastern markets, but what about all of those deals swimming below the nets in countries like Mexico, Brazil, and Indonesia? 

As we pontificate on the ‘future of outsourcing’ and point to public opinion and political backlash in the U.S. as the main threats to the industry, we need only to remember that the United States and Europe combined only make up about 15 percent of the global population.  Today’s emerging markets will make up more than 50 percent of global GDP by 2020.

So while today’s deal sizes in countries like China and Brazil are smaller in terms of revenue, we should pay close attention to the deeper implications and analyze how domestic enterprises are
adopting the outsourcing model in these markets. Brazil is an example:  Outsourcing IT services is common custom among Brazilian companies, but they don’t like offshoring and almost exclusively outsource to local partners.  And while they’re accustomed to outsourcing IT, they’re not yet comfortable with back office functions.  This in no way suggests that opportunities will not open up in Brazil BPO.  Research advisory firm IDC believes the market will grow by 5 percent in 2012 alone, and sees BPO as an opportunity for vendors that can clearly define their value proposition.

Most experts agree that outsourcing has become the new standard practice in global business.  There’s always the debate whether to in-house or outsource - like GM’s recent decision to reign in IT functions - but these are micro-level strategic matters.  At the macro/global level outsourcing isn’t going anywhere.  If anything it will evolve and take on unique forms across different domestic markets, particularly as cost arbitrage dwindles.  So as we blaze forward with globalization let’s keep in mind that the outsourcing industry’s fate will largely depend on what’s happening in deeper uncharted waters.