Out-Law News 2 min. read

UK firms to increase their offshoring, says TPI


Eighty-one percent of large UK companies plan to increase their offshore outsourcing over the next two to three years, while only 4% expect to decrease it, according to research published by sourcing advisory firm TPI.

TPI also found that companies choosing to offshore their IT and business processes to low-cost locations, such as India and China, are increasingly doing so through wholly-owned subsidiaries, known as "captives", rather than external service providers. 

This, says TPI, is a sign of increasing maturity in the market.

According to Managing Director Duncan Aitchison:

“The growth of captives stems from companies now being more aware of how to conduct an offshore operation and less reliant on external service providers. Buyers are increasingly employing hybrid models that mix some outsourcing with some ‘do-it-yourself’ offshoring, and where external providers are engaged, it is for more complex reasons than simple cost reduction.”

To assess the growth of offshore captives, TPI compared employee numbers at the top 20 pure captive operations in India with the total number working there in IT and business process management.

Their analysis reveals that the total headcount of the top 20 captives has increased by almost three quarters in the last year from 54,666 in 2003-04 to 95,225 in 2004-05. By comparison, the total number working in India in IT and business process management has increased by just a quarter over the same period. Fifteen of the FTSE 100 now have captive operations in India.

The survey of 100 senior UK outsourcing executives, carried out by research firm Simpson Carpenter, also found that many companies are readjusting the activities they base offshore.

According to TPI, companies are increasingly taking a global view of sourcing – separating processes out and deciding whether each one would be best based offshore, nearshore or onshore. For example, 50% of survey respondents expect to bring certain elements of their services back onshore in the next five years as part of a global sourcing strategy.

“Again, this trend reflects a maturing market,” said Aitchison. “In the early days of offshore outsourcing they often simply took their UK set-up and replicated it at lower cost in India. They are now more likely to utilise ‘global service delivery’ – that is to employ a mixture of locations for different functions.”

While India is still the hot favourite as an offshore destination – being used by 75% of the survey respondents – the survey found that there is close competition for second place, between Central and Eastern Europe (28%) and China (25%).

Despite being less widely used than India, Central and Eastern Europe is seen as equally appealing an outsourcing location, with both destinations rated attractive by 59% of respondents. It appears likely therefore that Central and Eastern Europe will make up ground on India’s lead over the next few years, said TPI.

China, meanwhile, is viewed as an attractive location by 41% of respondents. It is an immature outsourcing market and lacks English language skills. However, according to TPI, many large companies are establishing captive operations there, attracted by government support and a huge potential domestic market.

The survey findings also disputed the view that failure rates in outsourcing are high.

According to TPI, only 4% of UK outsourcing buyers are dissatisfied with their outsourcing arrangements, while 42% are “very satisfied”. Contrary to widespread expectations, 48% even believe outsourcing has improved customer satisfaction.

Sixty-four percent reported that their organisation’s contingency planning has improved as a result of their outsourcing, while 80% say outsourcing has improved corporate governance by clarifying responsibilities.

“These results confirm our experience that outsourcing, when approached properly, is far more successful than the widely-quoted failure rates of 25%-50% suggest,” said Aitchison.

We are processing your request. \n Thank you for your patience. An error occurred. This could be due to inactivity on the page - please try again.