Outsourcing in 2015: The Year in Review

December 21, 2015
|By Garegin Hakobyan

For decades, outsourcing has been an important strategy for many businesses. While it began as a cost-reduction tool, outsourcing has since evolved into a strategic solution for issues that range from process inefficiency to lack of skilled talent. Modern outsourcing is all about working with third parties to extend a company’s capabilities, maximize resources and improve the quality of products and services.

Global Outsourcing across Industries

In 2015, businesses are still recovering from the effects of the global recession, and growth has been slow in many sectors. These challenges are compounded by rising wages and office rental rates in emerging markets, market volatility as a result of the devalued Chinese currency, and new standards and regulations. Global outsourcing continues to be relevant across all industries, with outsourcing activity growing faster in certain markets than others. A 2015 report shows that the global business process outsourcing market is currently estimated at $511 billion, with an annual contract value (ACV) of over $100 billion (growing by 5 percent every year).

This year, companies outsourced various services for roughly the same reasons as years past: cost reduction, process improvements and access to skilled talent. However, the number of companies that are using outsourcing to drive innovation, operational scalability and competitive advantage is increasing, and these companies are demanding more value, accountability and comprehensive offerings from service providers.

Offshoring and Outsourcing to Standardize Processes

Like the past year, the number of companies that outsource to standardize processes and leverage economies of scale in 2015 continues to grow. This trend shows continued improved confidence in the ability of service providers to deliver high-quality services. The global BPO industry is still undergoing significant change, and niche/differentiated offerings can be seen in response to market demands. For example, Cushman & Wakefield reports that accounting and tax specialists are working with local universities to provide low-cost but skilled workers (chartered accountant status) that are groomed for long-term employment.

North America and Europe continue to lead other regions in terms of the number and value of outsourcing contracts, but Asia-Pacific (APAC) is currently the fastest-growing segment for global business process-as-a-service. While many countries in the APAC region have struggled with market volatility during the second half of the year, traditional business process outsourcing (BPO) locations like India, the Philippines and China continue to be attractive destinations for companies looking to offshore services.

Analysts predict that organizations will continue to use outsourcing in the coming years as one of the key tools to address cost pressures, limited resources, legacy systems and inefficiencies, and to cope with fluctuating market conditions.

Key Industry Developments in 2015

Healthcare and Healthcare IT Outsourcing

Healthcare outsourcing or the outsourcing of health and IT-related services to service providers saw significant growth in 2015 mainly due to regulatory changes in the United States. The US healthcare industry is currently undergoing a major transformation with the rollout of ICD-10 system (which increases the number of medical codes to 68,000) in October 2015 and the expansion of the insured segment of the population due to the Affordable Care Act. The industry has been preparing for these changes for a long time, and many firms are working with third parties to cope with the transition. Physician practices, hospitals and health organizations have found that successful healthcare outsourcing partnerships help their business maximize resources and remain profitable while still delivering high-quality care.

The ICD-10 system, for example, requires updates to practice management software, staff training and hiring of additional experienced coders. Service providers also offer specialized coding/billing software, integration services, and digital transformation services. Healthcare outsourcing providers, especially offshore firms in the Philippines, India and emerging locations, are highly in demand as they provide experienced medical billers, coders, transcriptionists and allied health workers for cost-effective rates. Analysts predict that demand for offshore healthcare services will continue to remain strong in the next few years. According to a study by Technavio, the global healthcare IT outsourcing market is expected to grow at a compound annual growth rate (CAGR) of 9.17 percent from 2014 to 2019.

Banking and Financial Outsourcing Services

In 2015, new tighter regulations in the global BFS sector have increased costs, leading to an increase in the outsourcing of regulated and non-regulated activities to external firms. BFS outsourcing is expected to grow at a CAGR of 6 percent from 2015 to 2019, driven by the need for sophisticated data analytics tools and segmentation models. Like other industries, cost is a key factor, and service providers helped companies reduce costs, identify investment opportunities and improve transparency. The most commonly outsourced services are IT related (88 percent), like application support and infrastructure management and support. However, many companies also outsource specific back-office services like finance and accounting, document management and processing, and other administrative functions.

Technavio analysts reported that outsourcing in the BFS sector allows organizations to improve regulatory compliance, reduce costs, share risk with providers, and improve customer service quality. Key BFS service providers vendors are located locally and offshore (mainly in India, China, Brazil and the Philippines), but emerging outsourcing destinations like Colombia and Sri Lanka are capturing market share. Analysts expect growth of BPO in the BFS segment will continue in terms of the number of outsourcing contracts.

Innovation and Technology

2014 analysts predicted that big data and cloud services would dominate IT outsourcing in 2015, and they were right. Companies requiring sophisticated analytics tools and cost-effective cloud-based IT/BPO services have worked and continue to work with third party providers to meet their needs. Analytics-based BPO solutions help organizations make better business decisions by turning data into insights about the company, its competitors, the market, and customer behavior. However, automation and data privacy/security issues associated with outsourcing are significant concerns and potentially hinder the growth of this segment.

Many IT outsourcing agreements will be up for renewal over the next few years. Analysts say this could mean that IT services will be transferred from one provider to another and move from one location to another. In 2015, “rightshoring” or the belief that the best IT services can be delivered from multiple locations, has become mainstream. Companies are not focusing their outsourcing efforts on a single area; instead, a North American hospital may outsource call center and medical billing services to the Philippines, application development to another location, and software development to yet another location.

Today’s businesses are using IT offshoring to extend their capabilities and not just cut costs. Offshore captive centers and operations units are still common for larger, more established companies, such as pharmaceutical giant AstraZeneca and German automotive corporation Daimler, but partnerships with local vendors remain popular for small and midsize firms.

Top Outsourcing Locations

Companies sent work to multiple locations in 2015. Both mature and emerging markets were represented in the top outsourcing destinations of this year. According to outsourcing advisory company Tholons, India remains the world’s top outsourcing location, followed closely by the Philippines, where Manila has eclipsed Mumbai as the call center capital of the world. India has 13 locations in the Top 100, with 6 cities (Bangalore, Mumbai, Delhi, Chennai, Hyderabad, Pune) in the top 10, while the Philippines has eight with two cities (Manila and Cebu) in the top 10. Other cities that made it to the top 10 are Krakow, Poland (no. 9) and Shanghai, China (no. 10).

Other high-ranking countries in the 2015 Tholons list include Costa Rica, Ireland, Czech Republic, Sri Lanka, Vietnam, Malaysia, South Africa, Brazil and Hungary.

But low labor cost is not the only factor that attracts companies to these outsourcing locations. Scale is also a big draw. Businesses are able to start from scratch and scale up to hire a thousand experienced workers very quickly in these countries. It’s also easy to hire someone with many years of experience for lower-value work. Another draw is talent. The Philippines, for example, has plenty of skilled talent, a young population that speaks excellent English, a stable business environment, improved infrastructure and a fast-growing economy. Mature outsourcing centers offer a variety of services that range from routine to judgment-based. Everything that can be outsourced can be found here, including finance and accounting, healthcare, HR, staffing, software and application development, IT, and customer and technical support.

Smarter Outsourcing in 2016

Outsourcing continues to evolve as the needs of the industry change and external pressures shape business decisions. The potential financial and strategic benefits of outsourcing can be realized successfully with the right outsourcing strategy. To develop a strategy that works for your business, it’s important to keep pace with global BPO developments and the changing business landscape. This means implementing innovative processes that drive competitiveness and leveraging new technology and globally-distributed skills. Working with a service provider in a mature BPO location like the Philippines is one way to gain maximum benefits from outsourcing. Rates in the country are the lowest in the industry, the workforce is motived and experienced, inflation effects are negligible, delivery models are flexible and tailored to each business, and the culture is highly compatible with the West.

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