Recession may drive re-thinking of some outsourcing deals

New report says current economic conditions could drive a second look to outsourcing.

Courtesy: http://www.purchasing.com/

Outsourcing of various services and functions within companies will continue during the ongoing global recession, but for US companies, the rate of outsourcing may slow slightly and more companies may take a closer look at their existing outsourcing deals for cost reduction opportunities.

A new report from law firm Morrison Foerster's sourcing practice points out that firms that negotiated outsourcing contracts in the past five years "could not have possibly anticipated economic upheaval on the scale that we are witnessing today." As a result, those outsourcing contracts may need to be re-structured to better match desired costs and services levels. There may be opportunities to relax certain service levels in those deals in the current market that could provide cost savings.

Or in some cases, there may be some services that could not be handled in-house during a busy economic time, but during a recession could easily be taken back in-house. The report also says that as threats of terrorism remain a concern in many global markets, companies will re-visit their outsourcing decisions with an eye towards risk management and business continuity, which could also lead to the adoption of more on-shore solutions.

On the flip side, extending the length of the outsourcing contract—if it is a service your company plans to continue outsourcing—could provide leverage for price reductions as outsourcing providers see shorter contract terms from many customers.

"Much of the increase in outsourcing in the early part of 2009 will involve off-shoring aimed at reducing costs," the report says. "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, 2009 may also see an increase in the provision of commoditized services by suppliers, whereby the customer must conform its business processes to receive services from the supplier in accordance with the supplier's processes, not the customer's."

When selecting an outsource service provider in the current market, the report says providers with a wide diversity in both industry base and geography are most secure. Smaller, more niche providers could be more vulnerable.