Learning the Recession Lesson

15 December 2009 Mark Kobayashi-Hillary

Mark Kobayashi-Hillary, director of the National Outsourcing Association, explains how the recession is forcing a reassessment of business models and a move towards outsourcing.

If current media rumblings are to be believed, 2010 could see companies un-battening the hatches and emerging into the business world post-recession. If signs of recovery continue to emerge and the tills start ringing again, 2009 will go down in people's memories alongside the dot.com crash of 2001 and the oil crisis of the 1970s as some of the worst times the world of business has seen. While the effects of the past two years will continue to be felt for some time yet, the start of 2010 should provide some time for reflection on what went wrong. As with each downturn and recession, there are clear lessons to be learnt to ensure the business world does not end up in a similar state again.

With the drying up of finance a result of the banking crisis, businesses were quick to shut their wallets. If a company is not sure when it will see its next pay cheque, the natural reaction is to hold onto what they have. Hence, purchases were being put off, projects halted and contracts delayed. The consequence of business spending grinding to a halt has been devastating, with many companies going to the wall. Bridging loans have been few and far between and both big business and the SME sector have suffered.

"Companies will seek to better understand supply chains and procurement processes to reduce dependence on single suppliers."

Where this crisis differs from others is in the way it engulfed the world rapidly, highlighting the fact that no country or sector can consider itself insulated from global finance and business. In the mid-1900s vertical integration meant companies were less connected than they are today.

Success in a recession was contingent upon the availability of raw materials and money with which to purchase them. Business, especially in the services industry on which the UK economy now relies, no longer works like this. The symbiotic relationships that now make up much of the business sector meant the recession was felt much more keenly in many more places than in previous years.

With this in mind, 2010 will see many companies reassessing the way they operate and working out the amount of endemic risk they carry. Most will also seek to better understand supply chains and procurement processes to reduce dependence on single suppliers while addressing their own vulnerability in the chain. National Outsourcing Association (NOA) research found that 50% of companies have already started this appraisal process in 2009 while 81% said they planned to reassess existing contracts and relationships.

This research was conducted during the depths of the recession so predictably many were looking to renegotiate to cut costs. However, if the recession does let-up in the New Year, the opportunities for doing more than simple cost-cutting and examining the potential for outsourcing and offshoring are palpable. In fact, the NOA’s research revealed that 67% of companies would look at outsourcing business elements that had not previously been outsourced.

Realistic and brutal

For those organisations that have made it through, the recession will have brought clarity as to what works and what does not. Companies will have seen the processes causing them to lose focus and the technology that is hindering rather than augmenting competitiveness. Those in charge of taking businesses forward should be realistic and brutal about what it will to take to compete in the future. To succeed in 2010, companies must recognise there is no going back from globalisation – this is how the world works and companies must follow the outsourced and globalised approach for success.

"67% of companies would look at outsourcing business elements that had not previously been outsourced."

This means investment in other countries, sourcing staff and resources from around the world, and sending non-core processes to where they are most effectively and efficiently carried out. When I recently asked Tony McAlister, CIO of online gambling company Betfair, about his recruitment plans for 2010, he told me of at least half a dozen countries where he is looking for people, just because he can’t find all the skills he needs in one single location.

It helps to imagine starting all over again. The development of the internet and the services and technology it can deliver has profoundly changed the way a business can be created and run. Starting a company in today’s technological environment is much more straightforward and cost efficient than changing the direction of a lumbering giant packed with legacy systems.

Cloud-based IT and virtualised environments mean companies can access world-class software from the very start. Such systems also enable the free flow of business data and information, a frequent bugbear of ageing legacy IT.

Likewise, the business of 2010 should recognise that the skills needed for its operation will not always be located in the same country. Many companies, for example, are now accessing IT development, accounting, legal and other back-office processing skills from around the world.

The fact is that the skills needed to carry out these processes are usually available at lower cost outside the country – something all businesses will be looking at going forward. In IT, for example, the skills for large-scale IT developments are often simply not available domestically, which makes offshore solutions an attractive option.

New models for business

The business of this year and beyond will look different from the large companies we recognise today. For example, email and office applications will be increasingly accessed in the cloud as will other core business technologies, such as CRM and accounting.

Applications such as Skype will grow in prominence for business communication, and the internet will provide the basis for more and more interlinked business models and supply chains. We are already seeing small firms adopting similar ‘virtualised’ business models where competitiveness is no longer contingent upon location and traditional processes. These types of models will increasingly find their way into larger businesses as outsourcing becomes evermore commonplace.

As countries gradually recover from recession, companies will need to become increasingly flexible and dynamic to succeed. The use of specialised outsourced suppliers and technology will continue to give businesses the tools they need to evolve and succeed in the post-recessionary world.

This change has been coming for a long time but the recession has definitely pushed things forward. The sooner organisations recognise the trends of outsourcing and globalisation, the sooner they can undo the recession’s damage and begin to compete again in the evolving global business world.