Outsourcing to China not so cheap anymore

June 30, 2008
The China Price used to be the global standard for low-cost manufacturing. It shut thousands of factories across North America, put tens of thousands of Canadians out of work and drove down the price of consumer goods around the world.

Now China’s cost advantage is being eroded by soaring oil prices, rising wages and an appreciating currency. Canadian companies that outsource their manufacturing to China are already feeling the pinch and some are even bringing production closer to home.

Could globalization be reversed in an era of high oil? What would that mean for Canadian companies that have come to depend on the China Price?

Levon Afeyan flew to China this week to find out the answer to these questions for his mid-size Montreal company. He’s the president of Seatply Products Inc., a manufacturer of molded plywood for use in commercial seating.

About half of Seatply’s products originate in China and Malaysia and he’s becoming increasingly uneasy about soaring freight costs that have seen the price of a shipping a standard container from China hit as much as $6,000 from $4,000 a year ago.

"People are taking a second look at everything because the costs are becoming prohibitive," said Afeyan, whose company’s efforts to cut costs through lean manufacturing techniques were featured in The Gazette in 2006. "It goes right to the bottom line."

On his trip, Afeyan will try to get price concessions from his Asian suppliers to help cover his rocketing freight costs. But he’s not expecting an easy time because his suppliers have their own problems and want to raise prices.

Inflation has already risen 8 per cent this year in China and the government just lowered subsidies on gasoline, resulting in an increase of roughly 20 per cent at the pump. Meanwhile, the Chinese currency has jumped about 17 per cent against the U.S. dollar, making exports more expensive.

And wages are rising fast. Depending on the industry and skill-level, wages are up by 10 to 25 per cent a year and labour shortages have developed in some regions.

CIBC World Markets economists, who predict oil is heading to $200 U.S. a barrel, believe the cost of maintaining a supply chain that reaches to the other side of the world is outstripping the benefits for many North American sectors.

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The State of Outsourcing IT

May 19, 2008
Outsourcing of labor, technology service and software is getting more complex and more frequent.

The market for outsourcing services is shifting as U.S.-based customers divide their outsourcing work among more providers, build in simple ways to break contracts and hire more U.S.-based software-as-a-service providers in addition to offshore outsourcing services.
An upcoming Gartner, Inc. report, estimates that the value of IT and business-process outsourcing contracts dropped by half during 2007.

However, according to Kurt Potter, the Gartner analyst who was lead researcher on the study, the total spent on outsourcing isn’t dropping; end-user companies are just spreading the work out among a larger number of providers, rather than relying on a small number of big-dollar contracts with IBM, EDS and other traditional providers.

Potter, who says the tactic is relatively new, calls it multisourcing and warns that it introduces more complexity into outsourcing contracts — both during negotiations and afterward, as companies try to manage more contracts and IT services vendors.

A recent IDC study of international outsourcing deals shows multinational companies are including factors in outsourcing contracts that are explicitly designed to allow the customer to renegotiate even long-term contracts when they see the need, according to Aprajita Sharma the IDC analyst who was lead researcher on the project.

The increase in price benchmarking, ‘claw-back’ and ‘blue-sky’ clauses in offshoring contracts give customers more flexibility by creating specific goals that, if an outsourcer fails to reach, can trigger a renegotiation. But, Sharma writes, those options can also drive up costs.

End-user companies aren’t the only ones outsourcing IT functions, though, according to a March study from accounting and consulting services company BDO Seidman, which surveyed the CFOs of U.S.-based technology companies on the topic.

Almost half (49 percent) of technology companies send some non-core work overseas, mostly manufacturing. However, 51 percent offshore IT services and programming, 49 percent send R&D overseas and a third support offshore call-centers.

Even with increased costs, however, the average length of the outsourcing contracts U.S.-based customers signed with IBM, EDS, CSC and other traditional suppliers got slightly longer during 2007, showing that traditional outsourcing is still a strong part of an IT services market IDC predicts will be worth $746 billion this year, up 6.8 percent from 2007.

Though it’s the smallest part of the outsourcing market, hosted applications are growing faster than any other part of the IT services market, at 15.9 percent per year, according to IDC. Immediately behind hosted applications are business outsourcing services, which are growing at 10.4 percent, the study says.

Application hosting — software as a service and other slices of the hosting market — is attractive to many companies because the software itself is relatively generic, and renting it means the customer doesn’t have to keep track of licenses, patches, version control or, more importantly, the skills the applications require for maintenance, according to Ray Homan, CEO of asset-management software developer BDNA Corp.

"Some companies want to have their applications on the premises and manage it themselves, and other want a time commitment or time-to-value argument for an investment," Homan says. "SaaS is more around the risk of identifying, training and retaining the skills you’d need for that software, though, not so much the capital expense of acquiring it."

Only 27 percent of CIOs polled by Gartner at the end of 2007 believe they have the right number of people with the right skills to meet all the needs of their business, and said outsourcing is a key way to alleviate that lack.

Source : http://www.baselinemag.com/

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IT Services and BPO to survive the U.S. slowdown: Global service

May 13, 2008
The online study aimed at analyzing the impact of the economic slowdown in the U.S. on the global outsourcing industry was conducted in the second week of April 2008. Of the 129 outsourcing buyers polled, nearly three-fourths were from the USA.

The slowdown in the U.S. economy would at best have a moderate impact on the global IT services and BPO industry, according to a global survey of service providers and buyers of IT and BPO services conducted by the CyberMedia publication for the outsourcing industry, Global Services in its forthcoming issue.

The online study aimed at analyzing the impact of the economic slowdown in the U.S. on the global outsourcing industry was conducted in the second week of April 2008. Of the 129 outsourcing buyers polled, nearly three-fourths were from the USA. Of the 203 service providers who participated in the study, nearly two-thirds belonged to the U.S. companies. The remaining respondents came from Europe, Latin America, India and China.


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U.S. slowdown to spur IT outsourcing - Gartner

April 28, 2008

Overseas firms have given deals to Indian software firms, attracted by an army of English-speaking workers and cheaper wages, but there are concerns about the impact of an economic downturn in the United States on the local companies’ revenue.

"Organisations are likely to conclude that increasing the proportion of work to offshore locations is the best way to reduce labour costs, among other benefits," Arup Roy, a senior research analyst, said in a statement issued on Thursday.

"Factors that will give India the edge over other offshore locations are scale and quality of labour … India is central to almost any discussion of offshore services delivery for these buyers," T.J. Singh, research director, said.

But buyers of such services would be more aggressive on containing costs, and demand "immediate savings" from service providers, Garner said.

Gartner’s comments come at a period when Indian’s leading software exporters say they are cautious on the short-term outlook because of the global economic uncertainty, but are confident of about long-term prospects.

Top exporter Tata Consultancy Services and No 5 HCL Technologies, have said they have strong deal pipelines, despite two of their large clients each delaying some projects.

Similar sentiments were echoed by No 2 Infosys Technologies Ltd, Wipro Ltd, the country’s third-largest exporter, and Satyam Computer Services Ltd, the fourth-largest.

Even if the United States went into a prolonged recession, firms would still look abroad to outsource routine IT work to cut budgets, Gartner said.

"In most sectors, the watchword is ‘caution’ - IT budgets have not yet been cut, and offshore services options are being considered or accelerated as a prudent step to contain labour costs," Roy said.

Source : http://in.reuters.com/ 

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