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Companies Face More Issues than Cost in Outsourcing Decisions

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WESTBOROUGH, Mass. (–Businesses that outsource labor to other locations might save less money than they expect but could benefit in other ways that may be as important or valuable as cost savings.

That finding was among the conclusions made by the Tabb Group after interviewing senior-level executives responsible for selecting offsite providers and managing outsourcing relationships at 14 major financial firms.

The Tabb Group provides technology and strategic issues consulting to financial services firms.

The executives reported that while cost savings and quality levels achieved in outsourcing were not always as high as they had anticipated, they did derive other gains, such as labor pool flexibility and an increased ability to focus their in-house resources on business solutions.

The Tabb Group found that the labor market in India is tightening, as increased local demand has made programmers a valuable commodity. To maintain quality levels in an environment of increasing turnover, U.S. firms are now negotiating up-front the right to interview labor providers and to have final say over assigned labor resources.

Firms that outsource have taken to diversifying geopolitical risks by working with vendors in different countries, setting up “captive” workforce companies abroad or investing in foreign companies to capitalize on the advantages of global workforces, the survey reported.

In an era of increasing regulation, firms are spending more time addressing security issues, the study reported. Companies now deploy internal teams to conduct extensive due diligence and evaluate physical security and data privacy issues.

“The initial cost of securing communications between offshore vendor and financial firm caught many by surprise,” said Barbara Edington, a Tabb Group report writer. “As third-party regulators get more involved, you will see costs continuing to rise with each new inquiry or audit that will be required.”

Companies that outsource have also discovered that when their internal technology staffs are relieved of commodity tasks, a cultural shift can occur in which interest arises in aligning IT and business departments. The result, reported the Tabb Group, is that technology workers expand their skill sets to become more aware of business processes, management techniques and business analyst responsibilities.

Outsourcing “is no longer based on simple cost equations,” Tabb Group Chief Executive Larry Tabb said in a statement. “‘Smart sourcing’ has become an important decision about not only a firm’s core business and how it can leverage its human capital, but also how it can gain competitive advantages by optimizing global resources.”

The outsourcing report, “Balancing Act: Getting the Offshore Model Right,” is available at .

Contact Bob Keane with questions or comments at: [email protected].


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