Canada: New Outsourcing Option?

,In addition to the growth in outsourcing to emerging markets such as India, opportunities in the North American IT outsourcing market will grow from $93.8 billion in 2000 to $159.6 billion in 2005, forecasts a recent Gartner (Stamford, CT) study, "IT Professional Services: Forecasts, Growth Rates and Market Share 2001."

An emerging beneficiary of the growing interest is the Canadian outsourcing industry. Although Canada-based outsourcing providers are benefiting from the current economic slump by winning contracts mostly from Canadian insurers, US-based companies that have been looking offshore may want to consider the benefits of outsourcing IT closer to home. These include close proximity, cultural similarities, inexpensive labor and exchange rates favorable to the US dollar. It may have been considerations such as these that drove Novato, CA-based Fireman's Fund's ($12 billion in assets) decision this past fall to award a 10-year, $380 million IT outsourcing contract to Montreal-based CGI Group.

Economic pressures—especially those associated with demutualized carriers—are the driving force of the business growth IBM Canada Ltd. (Toronto) has been experiencing in the past 12 months, according to Garth Isset, vice president of outsourcing, IBM Canada. Demutualized companies are seeking cost-cutting measures to come out on top in public comparisons of competitive cost structures and return on equity, according to Isset.

Heading North

Pierre Gagne, senior vice president, NewLink (Toronto), a consultancy that focuses on wealth management of insurance companies in North America, also sees the potential for US insurers outsourcing to Canada. He counts Canada's inexpensive labor and bilingualism among the draws for outsourcing functions such as call centers, especially in the eastern Canadian provinces such as Nova Scotia and New Brunswick.

Also, the currently weak Canadian dollar, which at press time could be purchased for US $0.66, is in some cases creating an opportunity to have outsourced functions pay for themselves. According to Gagne, a large US West Coast-based MGA (which he declined to identify) that owns a TPA in Canada is doing just that. "This is a situation where premiums are paid in American dollars, which are about 60 cents over the Canadian dollar," explains Gagne. "Resources in Canada are paid for just by the exchange rate."

Outsourcing providers with Canadian development centers are also looking to take advantage of recent US State Department warnings regarding travel in regions considered dangerous because of political unrest. Although much of the initial apprehension at the thought of sending IT overseas post-9/11 has passed, these warnings could dissuade current seekers of outsourcing providers from considering offshore solutions. According to Frances Karamouzis, research director, Gartner, there has clearly been an uptake in evaluating Canadian outsourcing options since the recent warnings on travel to India and Pakistan.

Another attraction of outsourcing in Canada is that, because of NAFTA, CIOs interested in having Canadian staff brought to the US as part of outsourcing deals will not be encumbered by visa limitations. Also, similar time zones are attractive to US companies, says Karamouzis, especially when it comes to e-commerce initiatives that demand lots of interaction with end users.

Still, the trend to outsource in Canada has obviously been stronger among Canadian insurers, for whom benefits such as favorable exchange rates do not exist. One such company is Sun Life Assurance Company of Canada (Toronto, $300 billion in assets under management) which recently signed a letter of intent with IBM Canada to manage some of the carrier's IT infrastructure. IBM Canada, which has data centers in Toronto, Montreal and western Canada, has also been awarded a 10-year CDN $850 million contract by Toronto-based Manulife Financial (CDN $147 billion in assets).