Can European companies get a better outsourcing deal than Americans?

The current market conditions present to companies considering outsourcing both specific opportunities and threats. First the positive news. The United States remain the largest market for suppliers, measured in total contract value, but it is also the country hardest hit by the crisis. The huge drop in demand combined with a devaluating US$$ against emerging economies, causes major concerns in boardrooms of suppliers that operate from India, the Philippines, China, South-Africa and other developing countries. (see also this report from FSO Knowledge Xchange on the Indian rupee, login required) Currency fluctuations can be covered in a contract, but the dependency of the United States forces offishore suppliers to double their efforts to penetrate the continental European market.

For those European organizations that dare to outsource now this can have positive consequences. In order to obtain their first customers, suppliers are more likely to buy their way in by offering favourable conditions. The rational of the supplier is that the return will come later, both by capitalising on the reference and by expanding the scope of the initial contract.
The opportunity for the European client companies is at the same time a risk for the local European suppliers who will continue to see the price pressure increase. The local European players have the challenge of convincing the client of their innovative solutions and knowledge of the local market, rather than to compete on price. In the meantime deploy typical European players like Atos Origin, CapGemini and LogicaCMG aggressive expansion plans in low wage countries to leverage their expensive European labour pool.

The possible threats come in the form of increased operational and political risks. One of the effects of an economic downturn is that fraudulent activities sooner come to the surface. While the whole world is under the spell of the $50 billion pyramid game of Madoff, the Indian market had its own fraud case with Satyam and a little bribe scandal at Wipro. The impact of this scandal will remain limited, but I expect clients paying more attention to their due diligence and exit strategies in new contracts with especially foreign vendors. The portfolio of Satyam has in the meantime been taken over by Tech Mahindra and I expect that soon everything will be business as usual for both the clients and the employees.

Fraud cases are however a form of operational risk for companies to outsource (more on the different types of sourcing risk in a future posting. At Satyam, in a couple of day 15,000 employees placed their resumes on the internet, looking for another job. This kind of ´exoduses´ is a direct threat to the operational provision of services to clients and one of the risks of outsourcing over having your own SSC/captive.
A more strategic outsourcing risk is engaging with suppliers that focus solely on one industry or service. Several suppliers that specialised in certain BFSI niches are now in trouble due to the large drop in demand from the U.S. and there is speculation on a number of bankruptcies among the smaller players.

To recap again the longer (but by all means not comprehensive) explanation on the raised question a slightly shorter answer. There are plenty of opportunities around (for especially European companies) to engage in an attractive outsourcing engagement with an offshore vendor. Do however not underestimate the potential downside. These include: currency fluctuations, inflation adjustments and strategies to manage risks like a supplier going bust.

And last-but-not-least: it is very tempting to completely squeeze the supplier in these times, but also now applies: you get what you pay for.