With companies expected to sign outsourcing contracts totaling over a half-trillion dollars 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 in many instances, to the point where it is now being positioned as 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
Outsourcing’s roots in overseas call centers 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 services from outside a company in favor of 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. Organizations realized functions that were important but not central to business operations, in such areas as accounting, human resources, data processing and software development, could be contracted to companies located in geographies with lower employee overhead.3 By sending this non-core work overseas, organizations could reduce the amount of money spent on these tasks and reinvest it into 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 contracts are expected to generate US$548.5 billion in revenue globally.4 That would represent roughly 12 percent of global trade in services, which was estimated at US$4.75 trillion in 2015.5 The information technology outsourcing industry is expected to continue growing at a 5.84 percent CAGR through 2019.6
Forming a Network of International Trade
In the beginning, outsourcing was dominated by Indian-based 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 centers to support outsourcing contracts as well. 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 outsourcing vendors and new market entrants have created centers and jobs in other low-cost geographies like the Philippines, Eastern Europe and Latin America. Local centers provide additional language capabilities, technology capabilities or time zone support often required by clients to meet service level agreements (SLAs) that dictate the support an outsourcing company will deliver.
Moving up the Value Chain
These 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 beneficial route to drive international trade and transactions.
The value of outsourcing is moving even further beyond cost savings 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 centers in more diverse locations around the world to better serve their 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 company, which provides an influx of disposable income into the local economy.
For their part, governments in developing and emerging 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 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.
Wherever the facility is located, the outsourcing company will support organizations both locally and internationally. For example, a local-, Indian- or other multinational-operated outsourcing center in Mexico will generate revenues supporting local Mexican clients as well as supporting the Spanish-speaking operations of companies in North America, Latin America and Spain. The revenue earned in these foreign-based contracts can benefit international trade not only by growing services exports, but because the client firms outside of Mexico will gain a high level of support at a lower price point and the Mexican-based office will gain a better trained workforce with international customer support skills.
In order to support and staff these new facilities, outsourcing companies are partnering with government and educational institutions to develop the required skills in students that will graduate to become the local workforce. This investment in language skills along with science, technology, engineering, and math (STEM) skills will create opportunities not only for employees, but ultimately sustain local economies, a compelling benefit for engaging in this type of international trade.
Outsourcing delivers benefits of international trade 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.