Planet Outsourcing

Come November 2007 and financial services companies would come under the purview of the Markets in Financial Services Directive regulation (MIFID). It is expected to cast an effect on the approach to operational risk of investment firms and also affect the conduct of business.

Aimed at creating a single European market for financial services, a number of rules have been laid down for managing outsourcing relationships through MIFID. It has laid down the requirements which govern information regarding the firm and the services that need to be provided to a client.

It further states that outsourcing should not be done in a manner that the quality of a company’s internal control gets impaired. Further there are also rules regarding in case money management function of retail customers are outsourced outside the domains of EU.

You might not have heard about procurement outsourcing till yet but this area is expected to witness a jump in the coming year. As per a report by Everest Research Institute, the expenditure of procurement outsourcing grew by around 35% in the year 2006 and the annual spending was around $40 billion.

Companies have realized that procurement outsourcing has generated savings between 5 to 20% in every category which can be regarded as a good sign that this sector would certainly grow in terms of outsourcing.

A number of European nations have realized the advantage of procurement outsourcing and some of the major companies working in this area are IBM, Accenture, Ariba to name a few. I hope India is listening!!

You must have heard these names- Infogrames Entertainment, Ubisoft and Vivendi Games. These are one of the world’s largest videogame manufacturers in France and you might have found their products coming with labels of low cost countries such as China but France want these manufacturers to produce the games within the country and it is pondering over giving tax breaks. The culture minister of France states that the production of video games represents national identity and therefore they must be manufactured within the country. He accorded video games the same status as that of Louvre.

Renaud Donnedieu de Vabres, Culture Minister, France stated:

Call me the minister of video games if you want; I am proud of this. Video games are not a mere commercial product. They are a form of artistic expression.

The videogame industry has found it to be a good idea and they are willing to forget outsourcing if the government is willing to offer them appropriate tax breaks.

There seems to be a reversal of trend taking place in the human resource outsourcing area. The trend a year back was that providers of HRO were running around to get hold of business but now it seems that they seem to be becoming choosy regarding their clients.

In order to reaffirm this statement let me tell you that one of the biggest companies Hewitt Associates has stated that it will become selective in picking up clients. It was only in 2005 when the buyers were calling the shots. The earlier trend was that clients dictated terms to the providers but there seems to be a reversal of the roles.

I believe that this trend would only work in the case of larger companies and smaller ones would still have to obey to the whims and fancies of the client.

Remember people, I had earlier told you about IRS outsourcing taxes to a private collection agency and the employees were certainly not happy with it. IRS has now moved from its earlier decision of outsourcing of seven centers to just two centers.

IRS stated the following reason for changing their decision:

The conversion was scaled back to ensure that a sufficient number of employees with the required training and security clearances are in place to manage the files during the upcoming filing season.

IAP Worldwide Services has been chosen for the outsourcing contract and the agency is expecting to save around $25 million during the period of the contract but the union feels they have been given a raw deal and a contractor was chosen over them to complete the job.

The country might be happy with outsourcing but its people are not. I am talking about U.K- a number of Brits are surely not happy with the jobs being sent to low cost destinations such as China and India and some of them believe that the trend needs to be reversed.

Most of them want that now the jobs should stay in the country and the companies which have already outsourced some of their functions should bring back the jobs back to the country. They believe that a lot many jobs have been outsourced which should not have happened on the first count.

Though the unemployment rate in the country is lower when compared to other European nations with the figure standing at 5.6% still there seems to be job insecurity prevailing among the people of U.K. With people not happy with the outsourcing trend, let’s see for how long outsourcing continues. Is the government listening?

The seriousness of the Indians for Japan can be judged from the fact that Wipro has been conducting Shimpo programme where software engineers are trained in Japanese language and etiquette. Year 2005 figures state that IT outsourcing market in Japan totaled around $ 15 million and the figure is expected to touch 2.34 trillion yen by 2010.

The latest figures from NASSCOM state that software and back office services export from India to Japan are expected to touch around $1.5 billion by 2010. As most of the deals are moving to China, Indian companies are establishing their base in China in order to get hold of some share in the deals.

Expect more work from Japan as it has started to face manpower shortage so countries such as Indian and Vietnam stand to gain. Besides capturing work in China, Indian companies are also vying for work in their home country as it is emerging as an attractive destination for low wage labor for Japan for their work.

There seems to be a trend where a number of companies now prefer to get their work done in their own country rather than outsource to low cost destinations such as India. Yes, you read it right and for this purpose rural America is emerging out as an attractive destination.

This strategy is being adopted by those companies who prefer their work to be conducted within their own geographical boundaries. Take for example where Oglala Lakta tribe members check the data entry work conducted in China and similarly in other states native Indians are being deployed for such work.

This is not only helping in preserving the jobs in the country but is also building a sense of social responsibility besides ensuring the economic development of the region.

In the coming years you would see a trend where insurance companies would be outsourcing the management of their account assets to external investment managers. Between the year 2002 and 2006 the outsourcing in this area increased from 56% to 68%.

As per David Holmes, Partner, Eager, Davis & Holmes:

Insurance company outsourcing is driven by a desire to earn higher returns, but with at least equal emphasis on portfolio diversification and risk management. The move toward outsourcing is not surprising in an era of 5% interest rates and an equity risk premium of roughly.

This trend is now visible across most of the asset classes and investment styles. With an increase in demand expected in the case of specialized fixed income mandates, within the next two years, twenty percent of the insurance companies are expected to outsource the mandates.

Whenever you come across the word outsourcing, the first thought that comes to your mind is jobs’ being transferred from states to other countries at the expense of people working out there but the word ‘outsourcing’ has a wider connotation.

Outsourcing also includes local outsourcing which leads to the creation of innumerable business benefits. Also known as managed services, in the case of local outsourcing, SMBs outsource their daily IT responsibilities to local technology consultants.

A quick growth is being witnessed in this area as a number of business owners are witnessing that it is beneficial to have external technology experts available for maintaining their work. This not only enables the company to focus on its core operations but at the same time save on costs.