Outsourcing by U.S. technology companies is on a decline, according to a new study, and the Nearshore region has suffered its own little setback. BDO USA says its 2011 Technology Outlook Survey of chief financial officers found that “outsourcing is down across the board.” This year, the survey says, 35% of U.S. firms are currently outsourcing services or manufacturing. That’s only a small drop from 2010’s 37% — but a notable slide from 2009’s 62%.
Granted, this is but one survey. But when the respondents are the people who control the money side, who can give the thumbs up or thumbs down to an outsourcing deal, it’s worth at least taking note of what they’re saying.
“Outsourcing can be looked at as a bellwether of the economy,” says Don Jones, partner in the Technology and Life Sciences Practice at BDO USA. “As we move beyond the recession, tech companies are planning to bring work back closer to home. The U.S. labor market is loosening. Two years ago, when we saw the highest numbers for outsourcing, tech companies were struggling to lower their costs.”
Year on year decline
Nine percent of the CFOs who are outsourcing said they are currently sourcing from Latin America, and 9% said it’s the location they would “most likely” consider in the future. What jumps out from the BDO charts, though, is that a year ago, 22% reported Latin America as a current outsourcing destination. What might’ve caused that 13% drop?
“It’s a very interesting blip,” says Don Jones, partner in the Technology and Life Sciences Practice at BDO USA. “A lot of the reluctance by many to consider Latin America is due mainly to perceptions of political instability, and some investment and currency concerns too.”
But that doesn’t apply to just Latin America. “Uncertain business and political climates” are seen by CFOs as the major obstacles to international growth in general, as are tax regulations and training of employees, BDO says.
Those companies currently not outsourcing say that if they did outsource, it would have to be in “their backyard.” The bad news is that not many of those companies are considering Latin America as part of their backyard. Most say that if they did outsource, they’d pick the U.S. (25%) or Canada (13%). Only 3% chose Latin America, the same percentage who chose Eastern Europe and Russia.
India and China remain the top destinations, but the BDO numbers for the past four years do show some notable downward trends for these two giants. In 2008, 60% of the CFOs said they outsourced to India. In 2011, it’s 29%. China still leads with 35%, but that’s -11% from 2008.
India and China remain the top destinations, but the BDO numbers for the past four years do show some notable downward trends for these two giants.
Trending toward insourcing
Getting back to Jones’s point about companies bringing work back home, a recent column by Stephanie Overby of CIO.com observed a similar trend of insourcing. She quotes David Rutchik of Pace Harmon saying that although companies continue to outsource “significant projects and transactions,” they are “strategically assessing … outsourcing relationships and determining whether to pursue a best-of-breed provider approach or take it back in-house completely.”
You can find surveys of CIOs that indicate there will be growth in outsourcing of IT functions. Jones agrees with that. “IT outsourcing will eventually keep growing because it’s the easiest thing to outsource. And once security issues are resolved, that will make a lot more businesses willing to outsource IT.”
Jones says outsourcing to Latin America could pick up over the next few years. As countries like Brazil “build out more infrastructure, and U.S. companies become more aware of that, and of the cost differences, the benefits of the region will become more apparent.”
Meanwhile, Nearshore companies need to be doing something to get their benefit message to the 80% of U.S. tech companies who do not have Latin America on their destination list.