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More and more companies are looking overseas for growth and outsourcing opportunities.
Kate O'Sullivan, CFO.com | US
January 22, 2010
With a so-so U.S. economy expected in 2010, many companies are looking abroad for high-growth markets and low-cost outsourcing locations. China and India are still favorite destinations, but experts say interest in Brazil and Africa is growing.
The outsourcing industry roared back to life in the fourth quarter of 2009 after a dismal performance in the first half of the year, as companies moved out of crisis mode. The total global value of outsourcing contracts greater than $25 million reached its highest level in six quarters, according to the Global TPI Index, released last week by consulting firm TPI.
Total contract value for the quarter reached nearly $25 billion, up almost 50% from the prior quarter, driven in part by strong demand for IT outsourcing. Thanks to the slow first half, however, contract value for all of 2009 declined 13% from 2008, to $74.5 billion, its lowest point since 2001.
Further indicating a resumption of the long-running offshoring trend, which stalled last year as businesses delayed and canceled projects, U.S. finance chiefs say they expect to increase offshore outsourced employment this year by about 3%, according to the latest Global Business Outlook Survey, which CFO conducts quarterly with Duke University.
U.S. companies are now moving "full speed ahead" to establish their own international presence as well, says Larry Harding, founder and president of High Street Partners, a firm that advises companies on doing business overseas. High Street's business has picked up significantly compared with the first half of 2009, he says.
Harding says Latin America — Brazil in particular — and Africa are drawing new levels of interest from U.S. companies, while India and China remain hot spots. (Brazil is also dominating the outsourcing market in Latin America, according to TPI.) "Even if the recession is over, I think the consensus is that growth rates [in the United States] are going to be pretty puny for the next couple of years," says Harding. "The huge growth rates are in China and India, and places like Brazil and Africa are starting to be added to that list."
Of course, the high growth rates of developing markets come with correspondingly high risk. Finance executives who have experience with expansion in Asia may know some of the pitfalls, but each new region poses its own challenges. "Brazil is still the most complicated place in the world to operate from a taxation perspective," says Harding, who also notes that the currency bears watching, although it has been stable for some time.
In Africa, because so few American executives have experience on the continent, "it's really important to understand well who you're working with, whether it's a customer, reseller, banker, or attorney," says Harding. "Avoid working with somebody whom you haven't had a relationship with in the past," he advises, or whom you haven't vetted with a trusted source. Still, he says taking the plunge into Africa could pay off: "The way things are looking, Africa will in all likelihood be the place where you would have loved to have been in on the ground floor."