Companies are pulling back on foreign outsourcing as they find cheaper ways to do the work themselves.
Firms who had worked with outsourcers for years are finding they can use the cost-cutting tricks of their vendors in-house and have more flexibility. And companies have found outsourcing can lead to a loss of expertise within the firm. Sending work abroad also has hidden overhead costs, like time spent on managing quality control, in countries thousands of miles away.
“Companies are realizing now that they might have outsourced jobs that they never should have,” said Atul Vashistha, chairman of Neo Group, which advises firms on outsourcing.
Some of Vashistha’s clients found they needed to move work back to the company. While outsourcers can run generic processes, they are less able to customize for specific industries. For example, the laws on banking transactions often change, but the outsourcer often will not know about those changes as quickly as the financial company, making them slower to adapt.
“They are not in the banking business–the bank is,” said Vashistha. “When you have roles that require deep domain knowledge, you end up having challenges.”
Companies also have adopted some of the same economies of scale as outsourcers, who save money by pooling the work of dozens of companies under one roof.
A shared service model, which allows companies to centralize IT functions across business units within a company, is gaining traction in the corporate world and reducing the need for certain jobs to be sent abroad.
Ascension Health reduced the use of outsourcing by more than half over the past two years as it started using shared service centers to process back-office functions, across the company’s 84 hospitals, and 400 healthcare centers, said Lee Coulter, a vice president at Ascension, who manages the company’s business processes.
Coulter is in the process of deploying Oracle’s PeopleSoft, so that all procurement, payments and contracting can be done through the company’s shared service centers. And by having the work done at Ascension, Coulter says, the company will be in a better position to use the data to help make business decisions and become more efficient. The process began more than a year ago but won’t be completed until 2015.
The costs of outsourcing are often overlooked, Coulter said. Staff time to supervise offshore operations, and tax issues of overseas business, can be greater than expected. Outsourced workers also have less of an incentive to work towards efficiency, Coulter said.
“You have more leverage to get the work done, how you want it, when it’s your own organization,” Coulter said.
But some businesses are still embracing more outsourcing as IT budgets are under strain. Smithfield Foods, the world’s largest pork producer, will have a smaller IT budget for both infrastructure and applications in the coming year, said Mansour Zadeh, CIO of Smithfield. And Zadeh says he will outsource more basic business processes to help the company do more with less.
“There are third parties in India and the Philippines that can do the job better for a lower cost of labor,” he said.
Coulter says his company will continue to use outsourcers, but much more selectively–perhaps outsourcing data centers, while doing the business processing itself in-house.
“The days of the megadeal are over.”
Published by Wall Street Journal Blog