Outsourcing Times

Reducing Cost Adjustments in Outsourcing Contracts

Many buyers of outsourced services are approaching the contract negotiation process without a full understanding of the issues that negatively affect their businesses. Companies that fail to implement appropriate price inflation mechanisms in outsourcing contract negotiations face risk of losing millions of dollars during the lifetime of a typical contract.

Buyers of outsourcing services often pay more than the standard price because they do not negotiate the impact of economic factors such as inflation. It is necessary for the corporate buyers to understand how future pricing factors will affect the duration of their outsourcing arrangement. Due to the diverse elements in outsourcing service providers' cost structures, the role of labor costs versus non-labor costs should be based on economic cost adjustment formulas. An accurate price inflator will reflect realistic inflation rates for labor, hardware, facilities and other factors.

Read my previous post titled “Offshore Outsourcing is Set for a Huge Growth” for more information on offshore outsourcing.

UAE: Hot Destination for Outsourcing

After India, Ireland, Malaysia and Philippines, now it is the turn of UAE to join the outsourcing brigade. The Dubai Outsource Zone (DOZ) development was first announced in 2004. The project was the brainchild of Dubai Holding. During the launch of the project, it was not expected that it would be huge success. However, it happened. Demand for space within the zone from both regional and international companies has already exceeded expectations.

The entire DOZ project is spread over 3,000,000 square feet. DOZ is an ideal outsourcing destination for companies because of its strategic location. It is just 15 minutes drive from Dubai Airport and five minutes from Dubai International City. Read our previous post titled "Official Certification for Outsourcing Experts" for more information on outsourcing.

Outsourcing of Fire Services Put Off

For a long time, the decision over the future of local fire services outsourcing in Half Moon Bay has been pending. It was expected that finally the voting would take place at the meeting of the Half Moon Bay Fire Protection District board of directors this week. However, it was put off until August 17.

The controversy cropped up after the July release of a San Mateo County Civil Grand Jury report that recommended that the district's administrative, training and fire prevention services to be contracted to another fire department by December 31. There have serious differences over this issue among the board members. In addition, employees of the fire service department are also opposed to such a move. Now, everyone is keeping the fingers crossed until August 17, when the final voting will take place.

$88 billion in outsourcing contracts up for grabs: new suppliers, line up!

All outsourcing contracts are time bound. As an outsourcing deal meanders toward its logical conclusion, it is a jittery time for the outsource vendor: will the outsourcer renew the contract, or simply dump the vendor in favor of another? It is certainly a time to retrospect and redefine outsourcing relationships.

The time is also one of opportunities for new suppliers. A show of one-upmanship can help them snatch a juicy outsourcing deal. According to a report by Everest Research Institute, outsourcing contracts worth $118 billion are due to expire between 2006 and 2008. While some existing relationships have firmed up and a quarter of this amount has been pushed back to status-quo relationships, contracts worth $88 billion are yet to be decided.

Some of the large existing IT contracts are likely to give way to multiple smaller contracts, and this leaves the door open for new players to flaunt their wares. In this situation, the big global suppliers such as CSC, EDS, and IBM are entirely justified in feeling the pinch of competition.

BBC's Goof-up in the Outsourcing Deal

According to the National Audit Office (NAO) has revealed that the BBC miscalculated the savings it would make through its outsourcing deal with Siemens Business Services (SBS). The BBC had originally projected that the deal would generate savings of £35.2 million. It has now admitted its mistake in the projection. It was found that the BBC overestimated the cost of running its IT in-house by £7.7 million, which resulted in the error.

The BBC Management acknowledged that the saving figure should have been updated. It also regrets that the mistake could not be identified earlier. Otherwise, it would have been reported to the executive and the governors. The management has assured that appropriate processes are in place to ensure that it does not occur again.

Silicon.com reports that -

The Broadcasting Entertainment Cinematograph and Theatre Union (Bectu), which represented approximately 370 of the IT staff the BBC sold to Siemens, fiercely criticised the BBC for its miscalculation of cost savings.

Outsourcing catches on among large aircraft carriers

As different air carriers fight for airspace, they are also engaged in a different battle—the battle to cut costs and make them financially attractive to customers. While the smaller carriers have started outsourcing work to maintenance vendors from the outset, the large network carriers in the US are also beginning to see outsourcing as a viable option to stay afloat in their cash-strapped situation.

According to Eclat Consulting, network carriers outsource 40% of their maintenance work, but the figure touches 50% in the case of the low-cost carriers. A Mercer Consulting study emphasizes this growing trend. The study reveals that 56% of airlines are likely to go in for an increase in maintenance, repair, and overhaul (MRO) outflow, and consequently the outside service providers in this sector are likely to benefit.

If we are to look at individual policies of different aircraft carriers, an even clearer picture emerges. Northwest Airlines outsources all heavy maintenance work and most of its line maintenance, while US Airways Group has outsourced nearly 60% of its airframe maintenance since early 2005. Not to be outdone, Delta Air Lines and AMR Corp. have also jumped on the outsourcing bandwagon.

All this is not a shot in the dark; according to Mercer, outsourcing cuts costs by about 75% as compared to in-house work. However, quality concerns are already brewing, particularly in the Aircraft Mechanics Fraternal Association. This can lead to a rethink in the near future in case these clouds of concern gather into a storm.

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Virtuos expands gaming plan with new funds

We have all heard of outsourcing firms paying phenomenal salaries to its employees to acquire the best skills available in the industry. Apart from the salary, outsourcing vendors also need to invest heavily in developing infrastructure capabilities to present a happy picture for potential outsourcers. Together, this calls for a strong financial backup, without which vendors cannot hope to survive and expand production in the competitive market of today. Thus, with the conclusion of a new financial deal with Legend Holdings, it is a happy situation for game industry outsourcing firm Virtuos.

Barely eighteen months into production, Virtuos can now give an impetus to its next-gen game development plans. There is a big outsourcing opportunity in the gaming sector globally, and Virtuos aims to figure prominently in that market by increasing its team three-fold over the next two years and investing heavily into training, processes, security, and IT. Where will the money come from? You guessed it, its from new financial partner Legend Holdings. Gamasutra cites market research firm Screen Digest:

[The outsourcing opportunity within the game industry] will reach $1.1 billion by the end of 2006 and is set to grow to $2.5 billion by 2010, representing around 40 percent of total game development spend.

Emission Trading and Outsourcing Boom

Surprisingly, emission trading has generated curiosity in the outsourcing circuits in the recent months. Emission trading allows countries to buy or sell emissions that come from a manufacturing plant or a refinery. As poisonous gases emitted by these units can cause health and environmental hazards, most countries have emphasized on controlling emissions. Gas emission is measured with the help of analysis instruments from leading companies. The data from these analyzers helps in calculating the total emission and it is passed to government authorities.

Most countries do not have either the technology or the infrastructure to deal with these issues. Hence, outsourcing is preferable to them. There are several firms in financial and energy trading that offer consulting and services in emission trading sector. The complete automating and outsourcing of emission trading is taking a new shape these days. Recently, Enzen Global has bagged two outsourcing contracts from European Union to provide outsourcing services to those who are trading emissions. IT Wire has published an article on the Same Topic.

If a manufacturer (or a country) has high emissions, which exceed the prescribed norms, the manufacturer has two options - either pay a penalty or buy equivalent credits from a non-pollution source. It can also choose to set up a non-polluting source itself and do an internal offsetting like setting up a bio fuel plant or wind power plant.

Most U.S. Consumer Products Companies use Outsourcing

According to reports, more than two-thirds of US consumer products companies are outsourcing some portion of their workforce to third parties. Consumer products companies are concerned about rising energy costs and tight margins. They anticipate lower growth rates in the coming months. As the domestic economy is all set to surge further, consumer products executives are expecting revenue growth of 6.2 percent over the next 12 months.

Large consumer products companies are tightening their expenses because of energy costs. There is concern among companies on the rising energy price level. The impact of escalating energy prices can be seen in the hiring plans, gross margins and investment plans of the companies. Higher costs and limited price increases have led to a margin squeeze for consumer products companies. As energy costs have escalated further, leaders of consumer products companies are having a tough time to handle the pressure. Reliable Plant has published an article on the Same Topic.

Overall, consumer products companies expect the size of their workforce will decrease by an average of 3.4 percent over the next 12 months, attributable to deep cutbacks by several large companies and caution stemming from rising energy prices.

Medical Outsourcing

Medical tourism is booming in the US, India and elsewhere in the world. Now US companies are trying to contain health-care costs. Medical expenses are high in the US as compared to other countries in the world. High-quality care and low-cost surgery is readily available in India, Thailand, Singapore and Malaysia. According to estimates, millions of surgeries are performed each year in the $2 trillion US health care system. As a result, companies are now planning to go for medical outsourcing to curb the rising health-care costs.

Most companies in the US may soon offer employees outsourcing as a health-care option. Major employers in the US are self-insured. They bear much of their employees' medical care. When they assess costs and benefits, they find the above countries as viable options for outsourcing the health-care services. Private payers are now ready to send patients abroad for uncomplicated elective surgeries in order to reduce costs.

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Mini-med plans are increasingly popular with contract and hourly workers, who are more likely than most other workers to be uninsured. But these plans are controversial because the buyers often think they cover more than they actually do.