Manufacturers Spend on Outsourcing to Add Capabilities, Lower Costs

TPI Index for second quarter of 2011 shows overall market down 18% from last year, rebound expected.

The top public global manufacturing firms spent $8 billion in the first six months of 2011 on contracts for information technology and business process services, according to the 2Q11 Global TPI Index. The index measures commercial outsourcing contracts valued at $25 million or more among the Forbes Global 2000 companies. TPI, a sourcing data and advisory firm, expects manufacturing outsourcing to pick up in the second half of the year and the outsourcing market as a whole to be in line with 2010 results.

The overall global market for outsourcing was down 18% in the second quarter of 2011. TPI officials said the market was weak in the Americas and also reflected fewer large contracts. TPI said there was a continued movement away from large contracts because of increased use of multisourcing by corporations and a general reluctance to commit to large investments.
In contrast to the Americas region, there was strong year-to-year growth in the Asia Pacific area (55%) and in Europe, the Middle East and Africa (13%).

"While manufacturers haven't lost their focus on cost control, they are focusing more on using outsourcing to introduce flexibility in their cost structure so that they can keep costs in line with revenue as it rises or sinks," says Dave Lewis, TPI's partner for manufacturing and automotive.

They are also using outsourced services when expanding into new markets and as a way to get access to skilled workers. "Manufacturing companies tend to have older workforces," Lewis notes. "As they need to get access to new skills and new technologies, instead of trying to grow that internally, often they will look to the sourcing marketplace."

Aging Assets
Lewis said manufacturers cut back on IT-related expenses during the recession, but now face having aging assets that they must replace or risk an adverse impact to their manufacturing processes. "I have talked to a number of companies that think they are now spending too little on IT," Lewis related. "They may not have refreshed their laptops for 5 years, or their networking or computer equipment."

Lewis identified a trend from highly customized outsourcing contracts to more standardized solutions. He said standardization keeps costs down for both service firms and their customers. "It is very difficult in the infrastructure space, with computers and networks, to get a strategic advantage so you really want to drive those costs as low as possible through the use of standardized solutions."

Many companies focus almost exclusively on cost reduction in their first outsourcing contracts. Lewis said that as these contracts expire, manufacturers have the opportunity to examine how their outsourcing providers can help them build their businesses. "One of the biggest sources of dissatisfaction with clients and outsourcing agreements is the lack of innovation and new technology they get from service providers. A lot of times, that is because the first time they do an outsourcing agreement, they are so focused on cost reduction that they dont leave the service provider enough latitude through margins to be able to invest in the relationship." Lewis said a "sign of a maturing outsourcing relationship" is where the parties focus not just on cost but also how new technologies such as cloud computing can help build the client's business.

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