A growing number of companies are outsourcing certain activities to local service providers, but this does not mean the days of offshoring are numbered.
It could be argued that this predicted decline in offshoring might be caused by an increased availability of skilled IT professionals in the UK.
Back-office processes that have been kept onshore recently include payroll, billing and HR services. A trickle of onshoring has become a flood.
Activities that demand more knowledge and greater skill sets will stay offshore. This includes basic data entry, and more complex knowledge services, such as risk modelling, data mining, actuarial services and auditing.
The workers who have the skills to complete certain large-scale operations to the highest possible standard remain offshore.
Yet one of the main barriers in offshoring has always been risk diversification. Doing different processes with vendors in different countries will continue.
Companies have often offshored parts of processes, rather than whole capabilities. This has required more management time and the capability to re-integrate the parts of a business process.
In future, we will need to see entire processes migrated. This will become increasingly feasible as emerging offshore destinations such as the Philippines, South Africa, Mauritius, Russia and Barbados become selected for their specialist language skills.
This will be because the service provider already has some connection or presence in that country.
Governance will also emerge as a key issue for offshoring, to increase productivity and savings. Compliance with laws, such as the Sarbanes-Oxley Act and the Markets in Financial Instruments Directive (MiFID), will encourage company directors to take responsibility in offshoring.
It will become even more important for management to demonstrate that the organisation has the necessary assurance mechanisms to monitor and mitigate risk across its network of relationships.
As we come out of recession, outsourcing relationships are already being managed better by a combination of controls, policies and guidelines, alongside clearer service-level agreements, vendor monitoring and control, auditing, third-party reporting and change and termination processes.
If people fear another recession, they will be more keen than ever for this trend for demonstrable control to continue.
The future will see offshoring pilots turn into full-scale operations. This will take more effort, focus and investment than many expect, understand or have planned for. Short-term cost savings may fall by the wayside, meaning some may question their move offshore.
Yet most will see a significant structural impact on their cost/income ratios. This, coupled with vendor maturity and reduced learning costs, will create the necessary offshoring momentum for new entrants.
As a result, we will soon see cash-rich sectors, such as financial services and companies that did not ride the initial offshoring wave, consider a move offshore.
In the short term, Build Operate Transfer (BOT) models will become popular and a few large players will develop new captive operations.
Many will want to keep their options open as the market matures. Processes need considerable re-engineering and re-architecting to deliver a consistent customer experience, though many will not have worked out how to do this yet.
Longer term, large organisations with global business intent will continue to operate captive models. Some will see this as an entry point into markets such as India.
Others will either not transfer their BOT contracts, or sell their captive operations to vendors. Taking investment away from the back office will only really happen when organisations can outsource into a mature market.
Captive operations of international companies, especially 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 captives will offer these services to third-party customers, turning their offshore processing operations from cost to profit centres.
Offshore vendors aware of a need to globalise may acquire companies in the BPO and IT spaces. Global providers, however, will expand in the offshore BPO space, both organically and where suitable targets are available by acquiring other offshore providers.
Rapid consolidation in the industry will follow.
Ferenc Szelenyi is EMEA vice president of public sector services at Dell Perot Systems
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