Patterns of outsourcing by European corporations point to a future of 'concerted networks' of clients and service providers, eroding the traditional vertical integration model. The prediction arrives in the Ernst & Young study, Outsourcing: the Rise of Fragmentation, which also indicates that key back-office functions are likely to be outsourced on a growing basis over the next two years. In addition, the study paints a glowing picture of current outsourcing trends, revealing that seven out of 10 European corporates are currently using the sector.

The report pictures a departure from the centralised business model, in which companies diverted ancillary functions to outsourcing providers as a means of focusing on their core businesses. It describes a fresher scenario, in which each layer of that core is required to be a profitable entity, and often has to tap outsourcing talent as a means of achieving this. According to the report, the preconditions for this new landscape have been provided by the online economy, globalisation and deregulation.

Details for the study were drawn from interviews with 600 decision-makers within European companies, and show that outsourcing is clearly the preferred method of externalisation; competing methods include partial relocation, subcontracting and subsidiary. Country-to-country, Belgium is leading the field with 81% of corporates outsourcing work, followed by Spain on 77%. With the lowest activity in the sector, France still manages 63% – not far off the 70% European average.

'Competing in the global economy and having to deal with a strong Euro, European [companies] need to be more scalable and profitable,' says co-author of the report – and leader of Ernst & Young's Outsourcing Advisory arm – Thierry Muller. 'This is creating a general trend towards the fragmentation of the traditional, vertically-integrated business. Each individual element in the value chain is now required to deliver absolute competence in its own right, and outsourcing, as a fragmentation tool, has proved to be remarkably popular in achieving this.'

For outsourcing providers who may be worried that the current high take-up rate from Europe points to an imminent slump – particularly in a troubled economic climate – the report provides ample reassurance. More than 20% of respondents from Spain, France, Italy, Belgium and Germany expressed that they intend to outsource a range of other functions in addition to their current activities over the next two years, giving the sector hope that it will continue to prosper in trying circumstances.

'Many executives are realising that outsourcing is about corporate growth and maximising the use of available resources,' says Muller. 'Outsourcing back office functions to low cost locations, for example, could provide substantial savings, but forms only part of the bigger picture that also encompasses improvements in quality to make the organisation fit for future growth.

'The overall outsourcing experience appears to be a positive one,' he concludes. 'The information age is enabling new outsourcing players to exploit the different stages of an organisation's value chain, and there are clear signs that broadening confidence in the outsourcing industry will lead to its adoption over an increasingly wide range of business processes.'

User Comments

Post a comment