Economic and political pressures are reshaping outsourcing — especially as the economic downturn allows new cities to compete with traditional outsourcing locales.

Outsourcing outshines other business sectors

Outsourcing is one of the few business sectors that continue to thrive, as companies, looking to curb expenses, hand over their operations to lower-cost providers.

Whether they provide third-party customer support and information technology services, back-office processing, or anything in between, outsourcing companies experienced an average of 13% growth in revenue last year and expanded their workforces by 18%, according to the International Association of Outsourcing Professionals.

As a result, major outsourcing providers such as IBM (IBM) and Capgemini (CAPP.PA), Wipro (WIT), and Infosys (INFY) are surviving the recession better than many companies.

New outsourcing locales in the West

“Of some comfort to the millions of people in developed countries who are out of work,” said Bruce Mills, Joint CEO of 3W IT Consulting & Contracting, “is the fact that global outsourcing providers are now looking to beef up their presence in Western countries such as the U.S. (and even Australia).”

Rising costs in traditional outsourcing destinations (such as Mumbai and Bangalore in India) are already fuelling a growing outsourcing industry in second-tier U.S. cities such as Indianapolis and Boise, Idaho.

“Widespread layoffs in the West — especially in the U.S.— have flooded the labour market with highly skilled workers who are eager for jobs,” Mills added. “This means outsourcing providers can now source talent, and offer services in developed countries, more economically than they could have two years ago.”

Brisbane in top 31 outsourcing contenders

According to KPMG consultants, Brisbane is among 31 cities around the world vying to become outsourcing hotspots through a variety of tax breaks, infrastructure upgrades, and government subsidies.

With a population of 1.9 million, an ‘Ease of Doing Business Rank’ of 9, ‘Rigidity of Employment Index’ of 3 — Brisbane, is gaining a reputation as a technology research and development hub.

The city boasts the highest number of tech graduates of any Australian city and is surprisingly international with 16% of households speaking a non-English language. Business costs are also around 15% lower in Brisbane compared to Melbourne or Sydney.

Outsourcing processes also set to change

“We are likely to see more cities competing for this market,” said Mills. “The net effect will be wider choices among outsourcing localities, and a trend towards more (and possibly smaller) contracts.”

While the credit crunch will promote outsourcing,” he added, “deals will be structured differently.”

The evidence is already there with outsourcing deals falling by 5% to 10% in value over the past 12 months.

Offshoring now more contentious than ever

“There’s no denying that, while outsourcing boosts profits for most clients,” said Mills, “the current economic climate is certainly impacting on the process.”

“Aside from the rise in alternate locales on almost every continent, we are sure to see more companies bowing to political pressures in terms of where they site their work — particularly if they are recipients of government aid.”

“Offshoring (sending work overseas) has always been a contentious issue — even in better economic times. But now, in the face of growing unemployment, this practice has the potential to be explosive.”

This is likely to encourage more companies (particularly those who are relatively new to outsourcing) to outsource work to local providers rather than looking further afield.

Some companies may even relocate currently outsourced customer-focused operations back home, while maintaining back-office services in cheaper countries.