SOURCE: VANCOUVER SUN
Canada can be a top player in providing services to the world
In the fall of 2001, BC Hydro estimated that its back-office operations would cost $1.74 billion over the next decade. That was too much money — and management involvement — to devote to activities that had little to do with the utility’s core responsibility of supplying the province with power, so it invited proposals from the private sector to take over this work.
The winner of a highly competitive bidding process was Accenture, a U.S. consultancy to which, in 2003, BC Hydro outsourced its customer care, information-technology services (which had been previously outsourced to Westech Network Computing Services), human resources, financial systems, purchasing, and building and office services. Accenture established a B.C. subsidiary, Accenture Business Services of B.C., to handle the assignment, and it, in turn, offered jobs to the 1,500 affected BC Hydro employees, of whom 90 per cent accepted the transfer. BC Hydro expects to save more than $250 million over the life of the contract, not to mention freedom from the burden of peripheral functions.
The union movement decried the move and tried to demonize the company, but they were — and are — powerless to stop what has become the defining financial and organizational strategy of the decade.
Outsourcing, of course, dates back to Biblical times, at least to 970 BC, when King Hiram of Tyre sent cedar, fir and cypress logs, along with architects and workmen, to build King Solomon’s Temple in Jerusalem. However, “outsourcing” did not enter the popular business lexicon until the 1980s.
What a difference a decade makes. A report by Canada-based research firm XMG Global forecasts that global outsourcing revenue will reach $373 billion US by the end of 2009, up 14.4 per cent from 2008, with India and China ranked as the top destinations, with revenues of $48 billion and $28 billion respectively. India could see outsourcing revenue of $225 billion by 2020, according to the country’s National Association of Software and Service Companies.
The increase in outsourcing over the past decade has been driven by globalization and technological change. Liberalized trade has allowed companies and other organizations to buy manufactured goods and services from third parties — or from foreign suppliers in a related practice called “offshoring” — to take advantage of lower costs and often superior quality.
Not all offshoring is outsourcing. Companies may move production processes or services offshore but keep them under the same corporate umbrella. For example, many large computer users have their eyes on Iceland. Now, Iceland may seem an odd place to locate global data centres, but the island nation is marketing itself as the ideal destination for the world’s biggest information hogs. The growing popularity of cloud computing has fired up millions of servers, which now rival airlines as the largest consumers of energy.
Feeding the insatiable appetite for power is expensive, not only because of the cost of the juice, but also because it attracts carbon taxes. Iceland produces far more energy than it can consume domestically and 100 per cent of its electricity is renewable, thanks to a volcanic makeup that has blessed the island nation with an abundance of geothermal resources. Providing it can resist the folly of carbon taxes, Iceland can be a carbon-neutral nirvana for a carbon-constrained planet, and the perfect place for the biggest financial institutions, search engines, governments and other data hoarders to set up shop. Added bonus: Iceland’s cool climate will save them a bundle on air-conditioning expenses.
Although Iceland is likely to spawn outsourcing companies that will offer third-party data management and similar services, most institutions can be expected to accept Iceland’s hospitality but keep corporate functions in-house.
Studies of the outsourcing phenomenon in the past 10 years show that service offshoring, in particular, is associated with a shift to higher value-added activities in Canadian industries and has no effect on employment. What’s more, Canada is itself poised to become one of the top information-technology outsourcing destinations in the world.
PricewaterhouseCoopers says Canada could add 165,000 workers to the 550,000 Canadians already doing information-technology work by the end of this decade if it can win a three-per-cent market share of the forecasted global market for IT outsourcing. To do that, says Robert Scott, partner in IT advisory services at PwC, Canada must define its role on the global stage by building itself up as a global supplier of IT innovation.
Cost is still a major driver of outsourcing, and it’s easy to see why. A payroll clerk in North America earns $15 to $20 an hour; the same job in India pays $2 to $5. An analyst in India earns half the salary of his American counterpart. Recently, the Reuters News Agency has been using reporters in India to cover news on North American companies because it can obtain the same standard of journalism at a fraction of the cost to hire reporters based in North America.
However, as firms have grown more familiar with outsourcing over the past decade, cost is fading in importance and other factors are playing a larger role in outsourcing decisions. Quality is one of those driving forces. Some others, those that work in Canada’s favour, are proximity and security. The U.S. accounts for nearly 70 per cent of global outsourcing, and Canada is well placed to grab a significant share of that business as a reliable, safe, near-shore provider. U.S. companies are more likely to opt for near-shoring in Canada when the cost-benefit is at or above 65 per cent of the cost of a U.S. project.
Still, there is concern that Canada hasn’t yet built its reputation as an outsourcing venue for high-end and complex business-critical functions. Nor has it leveraged its population — ethnically diverse, with cultural connections to the world’s top outsourcing destinations — to serve as an international broker of outsourcing services. These will be among the challenges Canada will face in the coming decade as it finds its place in the changing global economy.
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