January 26, 2010    Volume 17, No. 2

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Outsourcing Firms And Foreign Countries Target More American Service Industries, Especially U.S. Law Firms

By Richard A. McCormack

More countries are successfully emulating India's fast growing outsourcing business sector and are targeting a broader array of services for growth, according to Duke University's Offshoring Research Network and PricewaterhouseCoopers. Foreign governments are providing incentives for new companies to start selling services to firms located in high-cost regions including the United States, according to a survey of 500 global outsourcing companies.

The number of outsourcing firms is growing fast in Latin America, Eastern Europe and Asia. "New entrants from these emerging regions can be expected to intensify competition among providers, especially for commoditized contract centers, business process outsourcing and IT services," says the study.

Governments throughout the world, and especially China, have put in place policies and financial incentives to attract and nurture outsourcing firms. These policies are now "impacting the market," says the Duke University-PricewaterhouseCoopers study. "Growing competition among countries, cities and providers has transformed the outsourcing industry into a global race for market share. India's success and pride as 'the world's back office' has motivated other developing countries with a significantly underutilized university-educated population to replicate what India has done."

China is especially active in promoting its outsourcing industry. "It has mounted a vigorous challenge to India's software development outsourcing industry," says the study. "More and more U.S. and European companies are outsourcing software and IT services directly to Chinese service providers."

China has designated 20 cities as "outsourcing hubs to attract more international investment and has provided them with tax breaks, labor hour systems and employment subsidies," according to PricewaterhouseCoopers and Duke. China has created an outsourcing "demonstration" city -- Hefei -- which has already attracted numerous multinational companies to shift work there, including IBM, General Electric, Exxon Mobil, Motorola and Mitsubishi Heavy Industries.

The Philippine government has declared outsourcing a priority industry and has implemented policies -- formation of economic zones and income-tax holidays -- to boost foreign investment, according to the study entitled "Is the Global Outsourcing Industry In For a No-Holds-Barred Competition?"

Many low-labor-cost countries are bypassing the "commodity" outsourcing services such as call centers. They have pools of highly trained professionals who can provide services in design, innovation, knowledge processes, finance and accounting, marketing and sales, human resource management and procurement.

Legal services offshoring (LSO) is the next big thing, due to high margins and economic pressures on law firms. There have been "profound changes in companies' perceptions of the legal industry, once regarded as a sensitive and privileged activity that needed to be kept in-house," says the study. "The attractive economic benefit of LSO may explain the high number of service providers entering the market and of companies exploring opportunities to outsource their most routine legal activities over the past few years." In India, the legal process outsourcing industry has grown by 40 percent per year, and there are now 110 service providers concentrating in that specialty area.

Eastern European companies are also quickly emerging in the outsourcing industry, especially in software development, due to their proximity to Western Europe and the technology and R&D focus of their educational systems.

Demand for offshore outsourcing of services is being driven by the economic downturn. Until recently, companies were outsourcing functions because they could not find qualified workers. The primary reason now for outsourcing is cost savings. "A strong interest in cost reduction shows up in service provider selection decisions: 52 percent of service providers indicate low cost of service delivery is one of the five most important selection criteria," says the Duke-PWC study. "To ensure the realization of expected cost savings, a majority of companies include expected savings as part of the explicit contract terms."

Outsourcing companies continue to experience rapid growth "in spite of the difficult economic environment," says the study. "A large number of providers indicate their aggressive plans to initiate new software development and IT services in the next 18 to 36 months. In addition, the number of service providers planning to offer new finance and accounting, human resources and innovation services has more than doubled relative to the 2007-2008 survey responses."

The American outsourcing companies -- Accenture, HP and IBM -- have started growing their operations in places other than India, says the study, authored by Charles Aird (charles.aird@us.pwc.com) and Derek Sappenfield (Derek.sappenfield@us.pwc.com) of PricewaterhouseCoopers.

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