Experts expect outsourcing relationships to continue to grow in 2018 – but recognize new trends and challenges in this growing sector. As outsourcing becomes the norm in many industries, corporations must stay abreast of legislative activity in partner countries. When negotiating and implementing new outsourcing contracts in 2018, wise companies will invest substantial time and resources into avoiding common pitfalls and managing the risks of doing much of their business overseas.
In 2018, outsourcing agreements will:
- Continue to provide cost savings, as well as strategic flexibility and innovation
- Become a more and more integral part of M&A deals
- Increasingly depend on the governments of partner countries
- Require attention to detail, especially during the initial stages
Outsourcing is expected to see growth across all functions…particularly IT, Finance, and HR – Deloitte Development, LCC
Data Security Concerns
According to a May 2016 Deloitte poll, corporate respondents (85% of whom worked for organizations with revenues over $1 billion) identified data privacy as a key risk to companies that engage in outsourcing. 39% of those surveyed said they were likely to decrease their outsourcing levels due to concerns over data security.
Traction for advanced security automation, threat intelligence, and security analytics solutions will continue to be robust as enterprises look to build a holistic approach to enterprise security and fend off business risks – Jimit Arora, Everest Group
Partner Country Legislative/Regulatory Environments
In the same Deloitte study, researchers found half of the business people they surveyed had become more cautious about outsourcing in the recent regulatory climate. Almost 1 in 5 of these skittish outsourcers had already brought outsourcing jobs back onshore due to a lack of trust in foreign legislative bodies.
Infosys, the Indian outsourcing giant, took a 3,000-job hit when Britain indicated its intention to exit (“Brexit”) the European Union. In the last quarter of 2016, its revenues fell by 1.4%. Business and political leaders in countries that provide outsourcing labor grow increasingly restless in the face of first-world political instability. 2018 may see a rise in partner-country regulations that aim to decrease risk for their outsourcing companies.
We will not survive if we remain in the constricted space of doing as we are told, depending solely on cost-arbitrage, and working as reactive problem-solvers – – Vishal Sikka, Infosys CEO
Home Country Protectionism
With the Donald Trump presidency, some pundits anticipate a slowdown in outsourcing growth. Nasscom reduced its 2016/2017 outsourcing projections to 10% (down from 12% in the previous two years). Whether Trump’s protectionist rhetoric will lead to concrete action—or if the president will ignore campaign promises—remains to be seen. This uncertainty makes many corporations uneasy about increasing their investments in off-shore labor.
In particular, Trump’s interest in dialing back the H-1B program (from the current 65,000 workers per year) muddies the waters for corporations. On the one hand, this signals a move toward protectionism that could make outsourcing more difficult (and expensive); on the other, if the U.S. allows fewer foreign workers to enter the country, this may spur a surge in outsourcing on cloud platforms.
Expensive mistake…THE UNITED STATES IS OPEN FOR BUSINESS – Donald Trump (via Twitter)
Cloud-based outsourcing offers companies lightning-fast scalability and a pay-as-you-go model. However, because these employees often work in the (very) short-term, they may not provide the more nuanced and customized services companies expect from traditional outsourcers.
According to Adam Strichman of Sanda Partners, “Customers will be looking to leverage cloud as the core platform for new internal and external initiatives…Enterprises will demand significantly more value from cloud service providers…”
The UK has a mature outsourcing market, which is already well along in its shift to cloud, automation, and cognitive computing – Peter Bendor-Samuel, Everest Group CEO
In 2018, first-world countries (especially the U.S. and the UK) will continue to move past simple labor arbitrage to automation, which offers even greater ROIs than its predecessor model.
Automation, especially in the IT sector, has led to a dip in off-shore hiring. However, Wipro (one of India’s top IT service outsourcers) showed recent growth numbers of 9.9%.
New hiring numbers are static or declining, and the pace is decreasing even further – R. Chandrashekhar, NASSCOM President
The Bottom Line
Outsourcing continues to provide massive cost savings to U.S., UK, and other first-world corporations. However, this burgeoning industry has begun to slow down in the wake of political uncertainty and technological innovation/automation.
Savvy executives can still find great value and large ROIs in this sector, but only by carefully studying the market, understanding the shifting political landscape, and carefully targeted outsourcing companies for their specific niches.