As we enter a new year, 2010, there are clear signs of increasing adoption of business process outsourcing by retailers who consider it to be a strategic tool to manage their businesses better. According to Gartner, the business process outsourcing segment is expected to reach $235.2 billion by 2011, expanding from $160.7 billion in 2007, which amounts to a compounded annual growth rate of 10.3 percent.

So, what are the drivers for outsourcing?
Unsurprisingly, the primary driver is reducing cost. The cost reduction motive stems from the multitude of challenges facing retail companies today - increasing economic pressures, falling consumer confidence, poor consumer spending – all of which are increasing the appeal of outsourcing. Specifically, for retailers in the UK, struggling with a sudden fall in consumers' willingness to spend, the priority is to protect margins. Consequently, they are looking at different options to stay competitive. Outsourcing to emerging economies offers significant cost savings. Substantiating this trend is Datamonitor’s report ‘Retailing in a Recession: The Opportunities for Outsourcing’ which describes how retailers, driven by the need to both generate revenue and cut costs across the organization, are turning to BPO service providers to build efficiencies in their businesses.

Reducing costs is not the only reason for considering an outsourcing destination; the other prominent drivers include creating a global footprint, exploiting regional, cultural compatibilities, disaster recovery management and taking advantage of local talent. While the benefits and advantages of outsourcing are well known, what is still up for debate, however, is whether to adopt an onshore or offshore approach. Onshore outsourcing (or domestic outsourcing) refers to obtaining of services from someone outside a company but within the same country. Offshore on the hand utilizes the services of vendors anywhere else, across the globe.

Companies need to weigh their line of attack before deciding on its outsourcing strategy. While offshoring is a rapidly growing trend, it does not necessarily indicate that all jobs will leave UK. Rather a strategic combination of onshore and offshore retailing can be highly profitable rather than choosing one approach alone. Such a combination enables companies to increase capability to service global customers through multiple offshore delivery centers located globally, while simultaneously retaining a solid onshore position of strength.

Crossing global barriers – India, Europe, Mauritius and Manila emerge as popular outsourcing destinations
The two biggest costs centers for a retailer are staff and inventory. Retailers are therefore looking at service providers to provide a solution that would help slash costs across these two critical functions. In order to reduce staff costs therefore, a retailer must be convinced of the skill availability in the outsourcing location along with business environment.

While UK itself is an attractive offshore location simultaneously providing tremendous advantages as a home ground (not least because of the absence of language barriers) and as a launch pad for subsequent entries into Europe, offshore locations also provide opportunities that extend beyond onshore locations. India, with its vast pool of skilled manpower at a reasonable cost offers a strong value proposition and tops the 2009 list of global outsourcing market with revenues projected to be $48 billion. However there have been a growing number of countries emerging as competitors. Malaysia, Mauritius, Manila and Poland have emerged as viable hotspots for offshoring due to a commitment by their governments to build and develop local infrastructure. All these locations provide a distinct advantage of being in a different time zone that gives it flexibility in working hours, thus making offshoring more efficient and cost effective.

While a choice of offshore locations generates competition, it also creates uncertainty as the cost advantage shifts swiftly from country to country. It becomes imperative for retailers to keep track of where the right skills and cost savings are with the continuous and rapid pace of change in outsourcing market.

Hence, to meet their business imperatives, many global retailers are leveraging the outsourcing industry’s advantages. Reputed names, including Tesco, Target, Wal-Mart, have been leveraging offshore destinations for several years now. Having begun by outsourcing their IT functions initially, these companies are today deriving benefits from outsourced business processes as well. Tesco, the UK-based international grocery and general merchandising retail chain that operates more than 2300 stores in the world, set up a shared services center, in Bangalore, India, in 2004. The back-office handles IT functions such as enterprise application integration and BPO functions such as financial processing, payroll and bill processing. The company recently increased its headcount from 1,300 to 2,000 people.

Services provided
Typically, offshore companies offer services in customer relationship management, human resources, facilities management and finance and accounting (F&A) functions. F&A outsourcing, in particular, offers a huge cost saving potential. The mature outsourcing markets have further seen a paradigm shift from transactional to transformational services as end-to-end business partners to retailers that span market research and analytics services to create insights into buying patterns of shoppers.

Conclusion
Given the urgent need to create leaner organizations, while at the same time focusing on improving the customer experience, strategic outsourcing has become a strategic option in the hands of the retail industry. With this in mind it is understood that to survive, companies will need to be innovative, differentiate and exclusive products will need to become an integral part of retailers’ operations. This will no doubt, result in intense focus on costs throughout the consumer value chain. By partnering with mature service providers, retailers stand to benefit in multiple ways.