U.S. Companies Slowing Offshoring Startup Activities

Latin American is now a preferred location for offshoring contact centers and IT functions.

Financial services and insurance companies are adjusting their globalization plans, according to a May 28 statement, announcing the release of the fifth annual Financial Services Offshoring: Moving Toward Fewer Captives and Global Cost Competitiveness by the Center for International Business Education and Research's Offshoring Research Network at Duke University's Fuqua School of Business and The Conference Board.

The push by many companies to establish new offshore operations plateaued in 2009, the statement said. At the same time, firms seeking cost reductions show greater interest in contracting with large international service providers to benefit from their economies of scale and scope, rather than creating fully owned offshore subsidiaries.

The report is based on a survey of companies across the U.S., Europe, and Australia from 2007-2009. It measures the sentiments of business managers as economies recover from the effects of the global financial crisis and grapple with subsequent economic upheaval in Europe.

The research also shows that in 2009, finance and insurance firms increased their efforts to monetize current captive operations in which processes are performed by a fully owned subsidiary in an offshore location. In addition, it found that Latin America has emerged as a preferred location for offshoring contact centers and information technology functions.

"The global recession of the last two years seems to have slowed the creation of new offshore operations," Fuqua Professor of Strategy and International Business Arie Lewin said in the statement. "But we can expect the companies to expand the existing offshore operations they established over the past decade. Nearly two-thirds of finance and insurance firms in our survey plan new offshoring initiatives within three years, an increase from 42% in the 2007/2008 survey."

According to the report, finance and insurance companies have expanded existing offshoring operations despite significant challenges in the past 24 months, ranging from compliance with the Troubled Asset Relief Program to geopolitical issues to the recession itself. "Recent events have caused many firms to examine how and where their work is being done," The Conference Board senior advisor Ton Heijmen said in the statement.

India remains the primary destination for outsourcing/offshoring, according to the report. However, that country's market share of outsourcing has declined slightly in recent years because of higher wages for Indian workers with graduate and doctoral degrees, shortages in certain IT capabilities and the increasing cost of renting office space. As well, time differences have contributed to the shift toward offshoring locations such as Argentina and Costa Rica, which are only one to three time zones away from many U.S. business centers.

For companies considering offshore operations, second- and third-tier cities in the U.S. and abroad provide attractive alternatives, such as lower operating costs and reduced exposure to geopolitical unrest, according to the report. North Carolina's Research Triangle Park in the Raleigh/Durham/Chapel Hill area and Jacksonville have seen significant interest as offshoring destinations, the statement said.

Michael S. Fischer (msf7@columbia.edu) is a New York-based financial writer and editor and a frequent contributor to WealthManagerWeb.com.

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