Ferenc Szelenyi, VP EMEA, Public Sector Services at Dell Services, explores what the future holds for offshore outsourcing, and its likely impact on governance and customers.

It seems that there has been a growing trend to outsource certain activities to more local service providers, but this doesn’t mean that that the days of offshoring are numbered.

According to a recent PeopleperHour.com survey of 50,000 business users, 61 percent of UK organisations are now opting to outsource IT work to domestic service providers rather than to faraway traditional destinations like India and China. These are countries that, in the past, have offered cheaper rates and a much greater skills base. It could be argued that this predicted decline in offshoring might be caused by the recent availability of skilled IT professionals offering their services within the UK is on the rise.

Indeed, not a day goes by at the moment without the reporting of yet another back-office or customer contact process being outsourced onshore rather than a traditional offshore location. For example, typical back office processes that have been staying onshore recently include payroll, billing and HR services. What was initially a trickle has now become a flood. So what does all this mean for the future of offshore outsourcing and where is the industry as a whole heading over the next five years?

Going against the grain

Contrary to current opinion, I believe specific types of activities that demand a greater knowledge and skillset will remain offshore. These activities range from basic data entry to more complex 'knowledge services', which will include risk modelling, data mining, actuarial services and auditing. Certain activities will include more technologically sophisticated tasks such as the provision of radiology interpretation services to hospitals, outsourcing of financial and equity research by investment banks, and R&D services being outsourced by multinational engineering firms. Despite the current reported trend of keeping work onshore, the workers who have the skills to complete these large-scale operations to the highest possible standard still remain offshore.

However, there will still be challenges to offshoring moving forward. For example, one of the main barriers in offshoring has always been risk diversification. This means that placing different processes with different vendors, in different countries, will continue but may result in disaggregating the end-to end process. Currently companies have offshored parts of processes for migration, rather than whole capabilities. This has resulted in process fragmentation and required greater management time and capability to re-integrate.

The future will, therefore, need to see the migration of entire processes to achieve best practice. This will become increasingly feasible as emerging offshore destinations such as the Philippines, South Africa, Mauritius, Russia, and Barbados become selected for specialist language skills. This will be as the service provider already has some connection or presence in that country.

Governance, compliance and regulation

As the offshore vendor becomes an integral part of the customer's 'extended organisation', governance will also emerge as a key issue in the future of offshoring. Companies will increasingly focus on governance as a way to increase productivity as well as maximise savings. This increased focus will ensure that demonstrable good practices are being followed. Compliance with regulatory requirements, such as the Sarbanes-Oxley Act and the Markets in Financial Instruments Directive (MiFID), will highlight the responsibility of all company directors for the effectiveness of their company's outsourced control environment. It will become even more important for management to demonstrate that the organisation has the necessary assurance mechanisms in place. This will be in order to monitor and mitigate potential risks in its network of relationships.

It is good to see that, as we come out of recession, outsourcing relationships are already being managed better by a combination of controls that include a raft of policies and guidelines, clearer defined service level agreements, monitoring and control of the vendor, right to audit, third party reporting and change and termination processes. The fear of another possible recession means that this trend for greater demonstrable control will continue.

Customers

In terms of customers, the future will see a plethora of pilots turning into full-scale operations. However, this will take more organisational effort, focus, and investment, than many currently expect, understand or have planned for. Short-term projected cost-savings for some of these operations may, therefore, not materialise, resulting in some questioning the move offshore.

However, for the majority, a significant structural impact on their cost/income ratios will have been created. This, coupled with greater comfort provided by a maturing vendor market, a reduction in implementation costs due to reduced learning costs and the completion of current expenditure/income and management strategies, will create the necessary offshoring momentum for new entrants to come in.

As a result, the near future will see cash-strong industries, such as financial services and those companies that failed to ramp up in the initial offshoring wave, consider the move offshore.

In the short term, Build Operate Transfer (BOT) models will continue to grow in popularity and a few large players will develop new, captive operations. Organisations, however, will remain unclear as to how the market will mature and will want to keep their options open. In addition they will recognise that processes need considerable re-engineering and re-architecting to deliver the aspiration of a consistent customer experience, though many will not have yet worked out this new design.

Longer term, large organisations with global business intent will continue to operate captive models. Some of them will also see this as an entry point into new markets such as India, and as a way to expand their commercial interests there. Others will either not exercise their options to transfer their Build Operate Transfer (BOT) contracts, or sell their captive operations to vendors. However, the desire to re-allocate investment funds away from the back-office will not be realised in the short-term and will only be fully achieved when organisations are able to outsource into a mature market.

Captive operations of international companies, particularly those of banks and insurers, will continue to grow at the expense of third party suppliers as issues of risk and management control come to the fore. Some of these captives, seeing an opportunity to leverage their own domain knowledge and offshoring expertise, will begin offering these services to third party customers, thereby turning their offshore processing operations from cost to profit centres. Some may succeed; others will be forced to re-evaluate their core competencies.

In summary, offshore vendors will become acutely aware of the need to globalise and will make acquisitions in both the BPO and IT space. Global providers, however, will expand into the offshore BPO space, both organically and where suitable targets are available through acquisition of other offshore providers. Rapid consolidation in the industry will be inevitable and the plethora of today's suppliers will rapidly diminish.