Global outsourcing: a comprehensive review

outsourcing industry outlook 

Outsourcing has been a longstanding business solution to cut down operational costs, narrow focus on core operations, or expand internationally. Specialist third parties are hired to create goods or perform services in a cost-effective manner, enabling businesses to deploy their capital and internal resources elsewhere. With global connectivity on the rise, outsourcing can now be done from anywhere in the world and businesses of all sizes can leverage it for efficiency gains. As far back as 2019, around 530 SMEs were surveyed in the US and it was discovered that 37% were outsourcing a business process, while 52% had plans to do so. Deloitte estimates that global spending on outsourcing could hit US$ 731 Billion in 2023.

The current state of play

Within outsourcing, there are two main sub-sectors, Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO). The global ITO market is projected to grow at a CAGR of 4.5% from US$ 318 Billion in 2020 to US$ 425 Billion by 2026. Similarly, the global BPO market is estimated to grow at a CAGR of 4.2% from US$ 180 Billion in 2020 to around US$ 240 Billion by 2027. The future outlook remains positive, with the industry being aided by technological advancements, rising affordability of communication tools and remote working. In addition, the following factors are likely to have a major impact in shaping the outsourcing industry in the coming years. 

More innovation. Businesses may outsource non-core activities, but they will demand more quality and innovation from service providers. GSA-UK tracked 134 organizations in the outsourcing industry for five years and in 2020, revealed the following: while 35% of businesses still outsourced for cost-effectiveness, 23% wanted to improve customer experience and 17% wanted to transition from legacy IT to ‘as-a-service’ models. Going forward, innovative and cutting edge outsourcing solutions will be even more in demand.

Improved customer-centricity. The pandemic saw a spike in e-commerce services and the need to do more for customers. The online retail sales of seven countries (that contribute half of global GDP) rose from US$ 2 trillion in 2019 to US$ 2.9 trillion in 2021. Customers today expect businesses to be more responsive, reachable, and mindful of their needs. In order to deliver on all this, businesses will demand that their outsourcing partners work more closely with them to design and execute a better quality customer experience.  

Continuing cost-effectiveness. Reducing business costs will continue be an important consideration in the outsourcing industry. The ongoing inflationary trend will likely persist into 2023, with rising energy, raw materials, and labour costs for businesses. In this environment, staying competitive by saving on labour, infrastructure, and related costs will become even more important, and hence the role of outsourcing will likely become even more important than before.      

Better cybersecurity. Cybercrimes, data theft, and information misuse present challenges to the outsourcing industry. Outsourcing hubs will need to create stricter laws while businesses will be expected to incorporate stringent measures, such as getting cyber insurance policies. The increasing importance of the global cybersecurity market can be gauged from the projections: it is expected to grow at a CAGR of 13.4% until this end of this decade, from US$ 155 billion in 2022 to US$ 376 billion by 2029.

What is frequently outsourced and why 

Typically for BPO, back office functions such as logistics, payroll, and HR are outsourced while for the front office this includes customer service and marketing. When it comes to ITO, functions such as customer helpdesks, application or web development, cloud computing, and cybersecurity are outsourced. 

In 2021, Deloitte published a report on the outlook of global shared services and outsourcing after surveying 500 unique organizations across 45 countries. The most frequently outsourced functions were revealed to be IT, finance, and HR. These three remain the top functions performed in a shared capacity across industries and are continuing to grow robustly. However, companies outsource (partially or fully) other important functions too. In 2019, customer service was the most outsourced function, while during 2019-21, both customer service and procurement witnessed the highest increase for any category, that of 10%.

What benefits do companies gain from outsourcing these myriad business functions? The Deloitte report reveals that cost reduction, process efficiency & standardization (PES), and business value are the three main benefits of outsourcing. During the survey period, the proportion of objectives achieved through outsourcing in each category was: 88% in cost reduction, 78% in PES, and 63% in additional business value. 

Key outsourcing markets 

The outsourcing industry has collectively boosted business in a lot of countries by leveraging talent from there. Existing major players in the market include India, Philippines, and China among others. With the passage of time, other players are now emerging with immense potential, such as Pakistan, Egypt, and Poland. 

India (current)

India has consistently been a top outsourcing destination for many years. In 2021, it ranked second on Tholons’ Top 50 Digital Nations List, which measures attractiveness based on technology, innovation, and business process management. It is the leading Asian country for outsourcing software development, tech support, and IT-related services. It is a favorable outsourcing hub with its solid business infrastructure, state-of-the-art telecommunications, and cellular network in major cities. The government also has stable pro-IT taxation policies, which attracts businesses from around the world. These include the likes of Fortune 500 companies like IBM.

China (current)

China has been a traditional outsourcing destination among large manufacturing companies, accounting for 28.7% of global manufacturing output in 2019. This means products can be built rather inexpensively without incurring excessive import costs. Besides, the country has a strong focus on software development. It is home to more than 35,000 technology firms, with Chinese developers having an outstanding reputation globally. China also ranked 14th among 113 countries on the Global Innovation Index 2020. The country already has advanced digital infrastructure and supportive outsourcing laws. China also provides an abundance of labor at lower cost relative to developed markets, but somewhat higher than India.

Philippines (current)

The Philippines was declared as the BPO capital of the world in 2010 and held the title for over a decade. The BPO industry in Philippines contributed to 9% of the country’s GDP growth in 2017. Many big names like Microsoft and IBM outsource to the country for software development, BPO services, and IT services. It has favorable tax laws, and the Philippines Economic Zone Authority (PEZA) helps outsourcing companies receive tax exemptions. In 2012, the government introduced a strong Data Privacy Act to reduce cybersecurity risks and support the BPO industry. The cost of labor is once again relatively low. The country also has an impressive literacy rate of 99.27%, and high English proficiency, which is advantageous in carrying out customer service roles.

Pakistan (emerging)

Pakistan first became an IT offshore service provider in mid 2000s, and was recognized as the best alternative offshoring country in 2009. In 2017, it gained recognition as the most cost-effective outsourcing destination and ranked fourth as the most popular country for IT freelancing in the world. In 2021, the country’s ICT exports grew by over 40%, owing to the growing pool of software engineers in the market and increasing broadband and 4G internet penetration. Furthermore, the government is facilitating IT exporters, with a full income tax waiver until 2025. Today, the country is rapidly emerging as the future outsourcing hub of software development centers. Being the fifth most populous country in the world, it also one of the youngest, with 64% of it below the age of 25. Furthermore, a rapidly growing sub-section of the workforce is being educated at Western-modeled schools and universities, and speak English proficiently, with the potential of providing high quality customer service. 

Poland (emerging)

Poland has top-notch software developers and is one of the biggest IT markets for any software outsourcing service in Eastern Europe. The country is extremely low-risk from a security perspective, as it complies with strict EU standards like GDPR for IP protection and data security, which are common across the EU. It ranks 16th in Europe and 22nd in the world on the Global Cybersecurity Exposure Index. Poland has an innovative market, with it being one of the first countries in Europe to implement fintech solutions. It has a large, tech-savvy pool of young graduates with bilingual capabilities and high English proficiency. Cooperation with Polish specialists is smooth as the country supports many languages like Italian, French, and German, and is ranked 11th globally on the English proficiency Index in 2019. The labor cost is lower compared to the UK, US, and Germany.

Egypt (emerging)

Egypt is a fast-growing BPO destination with an aggressive digital transformation strategy. In 2017, the country’s ICT exports crossed US$ 3 billion. In 2018, it provided BPO services to approximately 100 countries in 20 languages. The Egyptian government invests heavily in upgrading the country’s IT infrastructure, with 5G commercial services enabling efficient connectivity with several countries. In collaboration with educational institutes, the government focuses on creating a talented pool in the fields of IT, BPO, and knowledge process outsourcing. This young talent also possesses bilingual capabilities, with many students proficient in English, French, German, Italian and Spanish. Egypt also offers massive cost-savings. In 2018, the pricing of customer care was roughly on par with India and the Philippines, and is considerably lower than the UK and North America.

Looking ahead

Considering its global trajectory, the outsourcing industry is only set to grow in the future. Until recently, outsourcing was solely driven by the need to cut costs and seek cheap offshore solutions. As the industry grows, however, the focus will increasingly shift towards improving the customer experience, seeking more innovation from service providers, and improving cybersecurity in the outsourcing process. In this context, both clients and service providers will need to focus on creating models that focus on quality and generating new business value.

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