Outsourcing in the credit crunch

As organisations are driven to focus on IT cost having a single supplier can minimise management, due diligence and supplier selection expenses.


A recent survey by the Management Consultancies Association (MCA) and the British Bankers' Association (BBA) found that 90 percent of UK companies have already outsourced part of their business.

This finding supports the consensus that the credit crunch is having a positive effect on outsourcing. Indeed, the current economic downturn means C-suite executives consider outsourcing a necessity—a way to reduce overheads and minimise negative impacts on the bottom line.

Although some cautious businesses remain wary of outsourcing, and still choose to consolidate processes, strong evidence suggests that companies that spend now will benefit when the market turns.

For example, they will be able to use IT and business processing outsourcing as transformational catalysts to address operational issues and cut costs. Additionally, their retained professionals will sharpen their focus on core business, i.e., strategic, issues. Outsourcing also improves the balance sheet; companies raise cash by selling existing assets and operations to suppliers, and by eliminating many operational costs.

The Need for a Single Outsourcing Supplier

Early adopters of knowledge process outsourcing systems and suppliers of bespoke applications are positioned well to weather the current economic storm. However, organisations that have not replaced and/or reengineered legacy applications will suffer.

Furthermore, as ageing workers near retirement, it will be virtually impossible to replace them, cost effectively, through outsourcing; their experience and expertise with specific applications are too unique. As such, the required skills and/or resource mix will be far larger than the incumbent teams.

Meanwhile, the looming recession in several key markets has brought the outsourcing focus back to cost for many companies. Having a single outsourcing supplier can reduce costs dramatically. It minimises management, due diligence and supplier selection efforts, while providing end users with the outsourcing equivalent of economy of scale; they save by buying in bulk.

Of course, using a single supplier—having all of one’s eggs in one basket—can increase risk. Larger organisations can mitigate that threat by breaking monolithic contracts into segments, introducing an element of competition while spreading risk.

This approach, known as multi-vendor sourcing, has morphed into multi-sourcing, in which one supplier owns a piece of service and provides a common governance framework.

New Trends

The current economic climate may also cause the nature of outsourcing deals to change. Recently, “mega-deals” have been consigned to the outsourcing scrap heap, in favour of multi-shoring and the selection of separate suppliers for each process. Additionally, we will see fewer contracts where costs are based on labour and/or effort.

Instead, contracts will be aligned to the volume of services; as demand increases, the price per service will decrease. Of course, as demand for a service decreases, so will its maintenance costs.

Som Sarma is Senior VP & Head of UK & Ireland, for Satyam Computer Services

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