More UK companies are setting up fully staffed offices abroad — while at the same time, the locations from which outsourced services can be provided are proliferating all over the globe. And between these twin trends, the distinction between outsourcing and offshoring is becoming blurred.

“The difference is clear: are you buying from someone or doing it yourself?” explains Mark Kobayashi- Hillary, offshoring director of the National Outsourcing Association and author of books on the subject. “Outsourcing can remove a lot of headaches: logistics about finding offices or training people, particularly from a different culture.”

The advantages of offshoring, however, are similar. “Cost is the main driver, without a doubt,” says Philip Carnelley, senior business adviser at the Hackett Group, a global strategic consultancy firm. Wage differentials between the UK and other countries, particularly in Asia, account for the vast bulk of offshorers’ savings.

The fact that IT operations are often overhauled at the same time as being offshored makes it difficult to separate the different strands of cost reductions, but Hackett estimates potential savings for companies with a global reach of more than £19m a year by a combination of process transformation and offshoring.

Sometimes it is more a question of certainty of cost, rather than simply a cost reduction, that provides the motivation for change. If companies want a set annual fee to help with budgeting, then outsourcing — which may well be done offshore — could provide the solution.

But money is only part of the story. “People are looking for capability,” says AS Lakshminarayanan, vice-president and country head, UK and Ireland, at Tata Consultancy Services, a global outsourcing specialist and IT services provider. “Some come to outsourcing from a cost perspective, but they also want to be more efficient and effective.”

Offshoring is no longer simply a question of sending low-skilled work to a low-wage economy; it is about hiring skills that are not core to your company.

The astonishing growth of the global offshore IT industry can be dated from the late 1990s and the surge in demand for IT professionals brought about as a result of “Y2K bug” fears.

Global sourcing of technology- related services in 2007 stood at £35 billion-£38 billion, a rise of about 30% on the previous year, according to Nasscom, the trade body for the Indian outsourcing industry.

India has capitalised on this demand: technology sector revenues now account for an estimated 5.5% of the country’s GDP, says Nasscom. “The vast majority of IT offshoring goes to India,” explains Vivek Nijhon, a senior adviser at the IT and business consultancy EquaTerra. “India has made offshoring a process, so it’s not a great challenge.”

India’s investment in education has created a large pool of graduates, an achievement that other countries want to copy. “Countries such as the Philippines are taking offshoring extremely seriously and trying to replicate what India has done,” says Kobayashi-Hillary. “With these services, all you need is a broadband connection and educated people. It can be a huge stimulus to the economy.”

Rajeev Sawhney, European president of HCL Enterprise, a global outsourcing specialist, says UK firms should take several factors into account when deciding where to offshore or outsource their work, from language to time difference.

Then there are issues of security and political stability. Kiran Sandford, partner and head of IT law at solicitors Mishcon de Reya, says these are often forgotten elements in a contract. “There is no such thing as global law,” she says, “so you could be dealing with two potentially conflicting legal regimes. If something goes wrong, the best thing could be not to fight it out in court but simply to pull out, so think about putting an immediate termination clause into your contract.”

As the industry matures, distinctions between countries are likely to become less of an issue for buyers and more of an issue for the outsourcing providers, which will decide what particular services are offered from which countries. “Where there’s an option for global delivery on bigger contracts, companies are already choosing between outsourcers, not countries,” says Nijhon.

Skandia UK

NOBODY could accuse Skandia UK, the investment, pension and life assurance group, of not doing adequate research on IT outsourcing. “It took us about a year,” says Tim Mann, the group’s customer service and technical director.

“We looked at everything — onshoring, near-shoring, offshoring — and we looked everywhere, in the UK, Europe and Asia,” Mann explains.

Skandia had three aims in mind: increasing IT capacity, improving competency and cutting costs. Those objectives were drummed into everyone who worked on the project.

The company ended up with a shortlist of three potential outsourcing suppliers, and in December 2006 it awarded a five-year, £100m contract to HCL Technologies in India to manage its IT infrastructure.

“Relationships and trust are central in India, where it’s important to be ‘part of the family’,” says Mann. “We spent time on cultural training to ensure we understood that.”

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