Outsourcing and Its Benefits in International TradeArticle

With companies expected to sign outsourcing contracts totalling over a half-trillion US dollars (AU$715b) worldwide this year,¹ the market for handing off business process management, software development and other important functions overseas is not only growing but dramatically changing. Once considered almost solely as a means for companies to lower cost, outsourcing has moved up the value chain to the point where it is now often considered a tool for innovation. Along the way, over some three decades, the practice has delivered multiple benefits to international trade: lifting several domestic economies, facilitating growth in international trade and liberating companies to focus on core business activities in order to compete more vigorously across global markets.

A Brief History of Outsourcing’s Rise in International Trade

Outsourcing’s roots in overseas call centres have long since branched into a variety of services that are outsourced to firms around the world. In fact, outsourcing has always been an option for companies, since it is simply the decision to obtain outside services instead of using an internal resource. In 1989 it was formally identified as a business tactic and linked with international trade, as it became synonymous with the practice of sending work overseas.²

In the 1990s, companies began to take a more serious look at cost saving initiatives to improve their financial performance, and thus the outsourcing boom began. Organisations realised functions that were important but not central to business operations could be contracted to companies located in geographies with lower employee overhead, particularly in areas such as accounting, human resources, data processing and software development.³ By sending this non-core work overseas, organisations could reduce the amount of money spent on these tasks and reinvest it in other areas of the business.

This model has driven the growth of the outsourcing industry and the recognition of its benefits for international trade and global economic growth. In 2016, outsourcing is expected to be a US$548.5 (AU$727) billion industry, globally.⁴ That would represent roughly 12 percent of total international trade in services, which was estimated at US$4.70 (AU$6.30) trillion in 2015.⁵ The information technology outsourcing industry is expected to continue growing at a 5.84 percent CAGR through to 2019.⁶

Forming a Global Network of Local Outsourcing Services

In the beginning, outsourcing was dominated by Indian companies, such as HCL, Infosys and Tata Consultancy Services, that leveraged a highly educated, local and inexpensive workforce. These firms ramped up into multimillion dollar (and eventually multibillion dollar) operations in a relatively short period, prompting multinational companies like Accenture, Capgemini and IBM to invest and create their own centres to support outsourcing contracts. These contracts grew in size and scope to support clients across multiple geographies and myriad services.

Additionally, as the outsourcing industry has grown to support multinational clients, the original outsourcing vendors and new market entrants have created centres and jobs in other low-cost geographies like the Philippines, Eastern Europe and Latin America. Local centres provide additional language capabilities, technology capabilities or time zone support often demanded by clients in service level agreements (SLAs) that dictate the specific quality and service levels an outsourcing company must deliver.

Moving up the Value Chain

SLAs have evolved from merely defining the tasks that an outsourcing firm will manage to including outcome-based provisions. Such terms include agreed-upon financial savings the client will achieve by engaging in the outsourcing relationship, making it a potentially appealing solution for customers and a beneficial route to drive international trade and transactions.

Today, outsourcing is moving further beyond cost savings with a goal to become a driver for innovation.⁷ Outsourcing firms are evaluating their clients’ needs and business strategies to create new, cutting-edge technologies that will provide better outcomes and improve the bottom line.

International Trade Benefits for National and Global Economies

Outsourcing is significant not only for international trade and the global economy but for national economies, as well. As outsourcing companies build centres in more diverse locations around the world to better serve multinational clients, those operations require local investments in infrastructure and facilities. From sourcing materials to employing skilled professionals to building facilities, the upfront spend can be sizeable, with an impact on local economies. Once operations are in full swing, employees generate salaries in local currency paid by an international parent, providing an influx of disposable income into the local economy and further boosting international trade.

For their part, governments in developing economies around the world have for several years been encouraging the development of local outsourcing startups, as well as competing with other nations to be chosen as hubs by multinational vendors. They look to follow the success of India, where the local information technology sector born of outsourcing now employs some 3.5 million⁸ and has helped grow the middle class.

The Takeaway

Outsourcing delivers international trade benefits in terms of business performance, national economic prospects and global economic vitality. Companies are tapping an expanding range of outsourcing capabilities to provide cost-effective support for tasks that are not core to their business, allowing them to focus on growing that business. Outsourcing will continue to evolve, albeit with uncertain impacts from the advent of such horizon technologies as robotic process automation. Stay tuned.