Back-office IT and business process outsourcing seen as another means to cost containment

Contract manufacturing and logistics outsourcing are common to the automotive, high-tech, and manufacturing industries. These types of organizations also are long-time users of outsourced call center and CRM services.

What's new is a concentrated effort to outsource back-office support operations—e.g., IT, finance & accounting, human resources, and procurement—to reduce costs and heighten performance, according to a report from Houston-based analyst firm EquaTerra: Outsourcing Trends in the Automotive, Manufacturing, and High-Tech Industries.

"Extreme levels of product innovation and operational efficiencies are prerequisites for North American companies to remain competitive against lower-cost emerging market rivals," says Stan Lepeak, managing director of research for EquaTerra. "Pressure has long been placed on production and blue-collar labor to become more competitive. Now that same emphasis is being placed on white-collar labor in back-office operations."

Boston-based AMR Research points out the same trend. Automotive manufacturers have heavily outsourced data-center operations and Web hosting offshore, says Ken Ruggles, AMR VP, value chain, so it's a logical extension to more aggressively outsource back-office IT as well.

Automotive, high-tech, and manufacturing organizations are more active in outsourcing back-office support operations—e.g., IT, finance & accounting, HR, and procurement. IT is the most commonly outsourced process, followed by call center/CRM, and finance, accounting & administration processes.

"We're forecasting a continued increase in outsourcing as a means for cost-containment," Ruggles says. "That will allow automotive companies, for instance, to use the money saved to better focus on competitive issues such as improving time-to-market and pricing, and addressing demand."

Increased use of this type of outsourcing is underscored in EquaTerra's findings for future outsourcing investment plans:

• 32 percent of manufacturing and related organizations that had previously outsourced one or more process areas plan to expand outsourcing into new process areas;
• 38 percent plan to expand outsourcing into new geographies or business units; and
• 29 percent plan to expand existing outsourced process areas.

Back-office business process outsourcing will continue to become more prevalent, with the emphasis shifting to extending outsourcing to more remote, global resources, Lepeak says. For some companies, outsourcing to lower-cost markets such as India or China can help them enter those markets to sell their own goods and services, he says. Smaller markets—e.g., central and eastern Europe—will most likely remain primarily a source of services.

EquaTerra says companies also will see opportunities to outsource less-common process areas such as warranty services, service after sale, document service, and forms of knowledge process outsourcing such as R&D and analytics.

On the outsourcing services-provider landscape, EquaTerra notes that multinational service providers are bundling IT and business process outsourcing, and extending services into others—such as R&D, logistics services, document services, warranty, and service after-sales.

"As outsourcing encompasses more back-office support, service providers will more closely resemble a critical member of a manufacturer's supply chain rather than a traditional third-party organization," Lepeak says. "Companies will see a broader array of service options, but the number of providers able to deliver large multifunction deals across multiple geographies will be limited."