Tapping the Brakes

An article in today's Wall Street Journal reports on the results of a recent offshoring survey conducted by DiamondCluster International Inc. DiamondCluster interviewed 153 buyers of outsourcing services in the U.S. and U.K. and 188 providers in about 10 countries. The survey focused on information technology, because it is one of the most popular services that is outsourced. Key findings:

• 64% of the buyers of offshore outsourcing services and 50% of buyers of onshore services planned to increase their use of such services in the next 12 months, a much lower figure than in previous years. Last year, 74% of the survey respondents said they planned to increase their outsourcing overall.
• About 8% of the buyers of offshore services and 9% of the onshore buyers said in the latest survey they planned to decrease their use of outsourcing in 2006. In last year's survey, 5% of offshore-service users and 7% of onshore-service users said they were poised to terminate contracts.
• U.S.-based companies are increasingly looking into Canada for outsourcing needs. While the cost isn't low, buyers are comfortable with "near-shoring" because of the proximity and common language.

Last week, I had blogged about how boundaries between various forms of outsourcing - nearshoring, offshoring, onshoring, etc. - are blurring as is the erstwhile distinctive role that each had in the manager's toolkit. The survey findings are further evidence of blurring boundaries and point to some interesting directions in the field.

As the Journal points out, there will be fewer successful new entrants. Further, slower growth rates raise the likelihood of consolidation amongst the service providers. U.S. based service providers, who are looking to be part of the vision of a "globally integrated enterprise," will likely leverage such consolidation to integrate offshore resources and cut costs.

Further, if the decrease in outsourcing to third party service providers is accompanied by a concomitant increase in the establishment of captive offshore centers, the findings might well point to the role of outsourcing and offshoring as organization design strategies that play an important role in catering to international markets. For example, in this article in the McGill International Review, the authors point out that very few of the Fortune 500 firms have the ability to sell products and services around the world. They urge companies to think global but act and strategize regional, implying that a focus on regional strategies should become central to strategic planning. Captive offshore centers might well have a better understanding of the focal firm's operational and strategic contexts and customers. Therefore, as companies turn to fast growing international markets as an important source of revenue, their offshore centers can transition from being a strategic service provider to being a business unit that develops and delivers products to the firm's customer in the region where it is located. A.k.a Dell?

So, this is not tapping the brakes in the race to outsource. This is a whole new race.