The global outsourcing services market was valued at USD 620 billion in 2020 and is expected to grow at a CAGR of 5.54% over the forecast period to reach a total market size of USD 904 billion in 2027.
Even before the pandemic, companies were strategically relocating business processes in an effort to reduce costs, replenish talent, and step into new markets. Given the unprecedented amount of disruption brought on by the global pandemic, the impacts of the “great resignation,” and the ongoing need for efficient, resilient supply chains, outsourcing continues to attract attention as a viable corporate strategy.
Selecting the outsourcing option that best suits your business needs, whether it be on, near, or offshoring, takes careful consideration of several factors, not the least of which is brand risk.
There are very distinct pros and cons to each scenario. For instance, sourcing locally allows companies to meet the ever-growing demand for fast delivery times and locally made products; however, costs may be prohibitive. In this article, we take a look at the risks and rewards of on, near and offshoring.
But first, an overview and some informative stats.
Outsourcing: An Overview
Offshoring, nearshoring, and onshoring all fall within the outsourcing umbrella, referring to the process of transferring different segments or services of a company’s operational activities to another company, most often in an effort to reduce costs.
To help clarify the terminology, here is a quick explainer:
Offshoring: When a US company outsources to China or India
Nearshoring: When a US company outsources to Mexico
Onshoring: When a US company outsources to Austin, USA
Outsourcing: All of the above
Enticed by the access to the profusion of skilled developers and I.T. capacity available offshore, big hitters such as Apple, Google, and Samsung now all have offshore R&D offices, a sign of the advantages of offshoring.
Here are a few other interesting stats:
- Countries such as India, China, and Malaysia are the leading countries in Business Process Outsourcing (BPO—a subcategory of outsourcing that contracts out internal business functions such as Human Resources, Customer Service, or Procurement)
- In 2021, the global BPO market was valued at USD 241.7 billion. Propelled by an increased focus on core competencies and a need for efficiency improvements and organizational agility, it is estimated BPO will achieve a market size of USD 512.4 billion by 2030
- The global procurement outsourcing services market was valued at USD 2.70 billion in 2021 and is expected to reach USD 7.86 billion by 2029. “The growing demand to improve supply chain efficiency and effectiveness is also contributing to the expansion of the market. Additionally, the use of procurement outsourcing is being driven by the requirement to follow regulatory requirements and guarantee compliance,” says DataBridge Market Research
- Countries like Hungary, Poland, and Ukraine have risen in popularity, attracting foreign I.T. companies due to their proximity to Europe, lower operating costs, and high availability of I.T. professionals. Similarities in working culture with the U.S. and Western Europe ease B2B processes and SRM
The Upsides of Outsourcing
When you are limited in human and financial resources, it may make good business sense to focus on executing your core capabilities to the best of your abilities. If you are having difficulty filling your talent pipeline in your local market and are struggling with skill shortages, offshoring may allow you to get high-quality product development. Savings in fixed costs, development, and production can be substantial and redirected to core activities, so you can circumvent staffing issues, enter foreign markets, and continue to scale.
For example, if a company is focused on R&D and innovation, it can outsource the production of standard parts to a specialized supplier, minimizing costs. Any savings can then be reinvested into R&D, leading to new product launches, and gaining market share.
Offshoring, nearshoring and onshoring are complex choices. China vs India or US/Mexico make interesting case studies