As the cost advantages of offshore outsourcing wane, companies are looking at insourcing, selective multisourcing, captive offshore centers and more.
By Rakesh Bhatia
With today’s business climate becoming more competitive, outsourcing has become a key consideration for companies looking to save money and improve their profit margins. The attractiveness of offshore outsourcing has continued to increase, and more than 75 percent of the top 2,000 global companies now use some type of offshore outsourcing.
Offshoring has become a big-ticket spend item, with offshore IT outsourcing contracts typically consuming more than 20 percent of an organization’s total IT vendor spend. And while cost reduction is usually cited as the primary reason for offshoring, the actual savings have been as low as 15 percent, and are often short of the targeted savings that originally drove the business case.
In addition, the labor cost differential between onshore and offshore expenses is shrinking. Traditional offshoring markets continue to see an upward trend in their costs, while corresponding labor costs in the U.S. have remained steady or dropped. As a result, the original business case to justify wholesale offshoring is diminishing, and alternate models have emerged.
As existing outsourcing contracts come up for renewal, the continually eroding cost-savings model is being carefully scrutinized.
Increasing Onsite Work
Companies have begun asking their service providers to adjust the ratios of onsite versus offshore labor, concluding that it is now worth paying the marginal premium to bring certain activities closer to their customers, while still taking advantage of the rigorous processes offered by their outsourcing partners. This is especially attractive in those outsourcing transactions that were “over-offshored” in the quest to achieve the most savings.