Report: “Outsourcing to Survive” to become norm in 2009

The economic downturn led many companies, especially those who don’t have existing outsourcing contracts, to consider outsourcing. But companies who already have outsourcing agreements are re-evaluating their outsourcing decisions with focus on risk management and business continuity.

Last year, analysts predicted the economic slowdown would result to more outsourcing projects driven by the need to lower costs rather than just added value initiatives. This prediction didn’t come as a surprise to the outsourcing community, but interestingly a new report suggests that outsourcing deals this year are most likely to be short-term transactions. The reason? Companies anticipate faster turn-around.

According to a report titled “Global Sourcing Trends in 2009” by U.S.-based law firm Morrison and Foerster: “Most of these agreements will be short-term transactions intended to produce immediate improvements to the bottom line, given the cost drivers likely to be underlying most customers’ decision to outsource. Outsourcing seemingly offers a solution to the requirement to save costs and focus on core competencies. In an environment where Fortune 500 companies have disappeared overnight, a successfully executed outsourcing deal could make a difference in a company’s ability to ride out these challenging times.”

Given the global economic crisis, it is reasonable for clients to focus on their current outsourcing relationships, many of whom are looking to squeeze out more value and further cost reduction in their existing deals. Tough times call for tough measures. In fact, “Although outsourcing is driven by cost-saving issues tend to be short-term solutions, such “outsourcing to survive” deals are likely to become the norm in 2009”, the report says.

The economic crisis is reason enough for companies to offshore certain business operations, but the Satyam scandal caused Silicon Valley companies to think twice on outsourcing. “Silicon Valley companies now must grapple with the risks of sending critical functions offshore even while the economic downturn adds to the pressures to cut costs”, reports the Mercury News.

Outsourcing firms should expect clients to restructure their contracts, as they are likely to review existing outsourcing agreements to determine whether they need to be restructured to reflect current business environment.

But offshore providers should take all the necessary precautions, as Morrison and Foerster’s report predicts an increase in disputes, including litigation, between clients and third-party providers. “As cash-strapped customers increasingly focus on their bottom line, they will become less likely to waive or ignore any potential claims that they may have against service providers in breach of their obligations. Contract disputes are never pleasant but, unless carefully handled, a dispute between outsourcing customer and supplier can escalate into a potentially very serious situation. It is vital to ensure that the dispute is isolated and escalated as soon as possible, before it has the chance to spill over into unrelated areas.”

Author: Kim G.

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