December 7th, 2009
2010 Predictions for the Outsourcing Industry
Firstly: my apologies to everyone for hopping on the perennial “Predictions Bandwagon”.  One may as well say “Stop press everyone, I’m just such an important smarty-pants you should listen to ME ME ME!” As Newt Gingrich told us earlier this year: “There is not one living being that can accurately predict the outcome of this crisis, all we can do is continue the dialog and the answers will slowly unravel”.
Secondly: we’ve conducted two major studies with outsourcing buyers globally this year (and am currently sifting through 800 responses - and counting - from our current industry study). While we can evangelize, prophecize, pontificate and sermonize, nothing can substitute for real data on what everyone is currently doing and planning to do. We have the platform here to do that, and I personally thank all of you who took a little time out to share their views, actions and intentions.
And Thirdly: I’m just such an important smarty-pants you should listen to ME ME ME!” So maybe I can help with the unraveling?
i) CIOs and CFOs will be uniquely challenged to avoid becoming “Cartoons of the Recession”.
Simply put, when there’s a serious recession in the works, the job of the CIO is relatively simple - cut costs and squeeze your suppliers using whatever means are at your disposal. CIOs rarely get fired in this scenario, unless they somehow messed up the cost-cutting. Their real challenge is when we emerge from the recession; the spotlight is firmly on them to deliver value. They are, quite literally, drowning in options, and it’s a major challenge to convince their peers they are capable of driving new business value into the organization. CFOs will be similarly challenged by the fact that they are going to have to prioritize investments versus cost-containment initiatives, exacerbated by the realization we’re moving into a period of drawn-out economic uncertainty, and not the classic economic recovery-cycle. Their options are as tough, if not tougher in this “New Normal“. Outsourcing is one key component to help crystallize these options - driving out cost, while creating new avenues of possibility. The CIOs and CFOs who “get” sourcing will be in the driving seat.
Most new outsourcing contracts are still dominated by customers which have got lots more room for maneuver with labor arbitrage. Sadly, this will continue to dominate most of the deals in 2010, and we’ll see the tiresome cost-per-FTE price battle continue.
ii) Labor arbitrage will continue to dominate outsourcing, but the smart providers will be focused on providing consultative value to their clients.
When you consider that 75% of service provider staff for ERP development and support are still onshore, there’s a lot more wiggle-room for new and existing clients to cut costs through lifting-and-shifting work offshore.  With commodity services areas such as ERP software development and maintenance, and transactional accounting processing, it’s getting harder and harder for service providers to command higher price-tags in this New Normal.
Those providers proving operationally-efficient and cost-competitive to win this labor arbitrage work today, will find themselves in a strong position to push higher-end business transformational services in the future, because they will already be present within clients delivering operational work. They need to demonstrate they are capable of learning their clients’ businesses, in order to move up the value chain to take on more consultative work.  Those providers which only focus on providing cheap body-shopping for commodity services, will get usurped from the market quite quickly. Worst still, not many of the leading providers are likely to acquire competitors which only have a transactional skill-set and low-value client relationships.
iii) Sourcing advisors will increase their influence in the market.
As the analyst business consolidates, many business leaders are looking further afield for inspiration, validation, data and advice. Especially in the sourcing world, where the best advice is often coming from those living the experience in the field. Our forthcoming survey results will reveal this is happening. Business decision-makers today need advice that can be made available in personalized models from experts that can deliver it. The smart advisors are going to be those which can adapt and scale their experienced talent seccessfully in a semi-customizable model.
iv) We’ll see at least two mega-mergers among the service provider-base.
We’ll see a couple more mergers on a similar-scale to Dell/Perot and Xerox/ACS. Expect at least one involving a traditional incumbent and an Indian-HQ-ed service provider, and at least one other between one of the pure-play BPOs and an IT-centric services provider.
v) BPO will rebound to have its strongest-ever year.
2009’s been a somewhat damp-squibb for mega-BPO deals, and while we’ve seen a lot of small-engagements and a few captive buy-outs, a lot of BPO decisions were delayed due to the crisis. As expected, ITO’s been the first to emerge strongly from the recession, as this is the most mature market where deals are transacted fairly quickly today. However, for many companies, especially those which have already outsourced much of their IT, the next wave of obvious cost-savings are to be found in BPO areas.
As our soon-to-be released new survey is revealing, transactional finance and accounting BPO will have a resurgence in 2010, with additional interest in management reporting, and we’ll also see a fresh wave or HR outsourcing, which has been quiet for a couple of years now, with new uptake in payroll, benefits admin and recruiting outsourcing. Procure-to-pay outsourcing is poised to accelerate, but we are unlikely to see muchrenewed traction in strategic sourcing services. We’ll also see renewed focus in the analytics space across several verticals and horizontal areas.
vi) Cloud will emerge, but its definition and concept will get diluted and confused.
Yes, Cloud is the future and a major game-changer, but - like everything else in the IT world - the definition and meaning will get diluted and confused (remember SOA, EAI, CRM, E-business etc etc). The winners in this game will be those providers which can articulate exactly what Cloud means and how companies can start evaluating Cloud-based delivery models. Cloud will become closely intertwined with outsourcing,  and we’re already seeing many service providers developing their Cloud-strategies.
vii) The speed of change will become frantic and frightening for many.
While in the good ol’ pre-crisis days, firms could take time over major (and sometimes disruptive) business decisions, companies today are having to make them much more quickly, and move much more aggressively to execute on them. This is particularly relevant where outsourcing is concerned.
As we’ve seen in the past few months, many of those sourcing decisions that were delayed during the first half of the year, quickly came to fruition recently, as firms realized economic armageddon has been averted, and it’s time to roll-out the new corporate agenda: quickly and aggressively. 2010 will not be a year for the timid, and we’ll have a lot of frantic people trying to grapple with outsourcing - we’ll see more political pressure, more negativity, more case-studies, more value propositions, more momentum and more energy than we’ve seen yet in this crazy industry.
viii) And finally…
I predict England will win the 2010 World Cup. Now you know how accurate I am -:)
November 8th, 2008
The change imperative: it's back-to-basics time
Even though you are probably more interested in the breed of puppy Barack is going to buy his girls, I have had a chance to ponder the realities of the recession.
In a nutshell, we have reached a crucial juncture in our economic history: gone are the days we can borrow whatever we want to subsidize ambitious business ideas, buy houses we cannot really afford, or fritter money away on expensive holidays. Walking down Boyslton Street at 7.30pm last night - one of Boston’s prime restaurant areas - every restaurant had vacant tables and was taking walk-ins. It really hit home to me that things have finally changed. Years of over-spending have finally caught up with us and we’re now feeling the pinch. But whether this was to be a rapid banking meltdown, or a long painful slowdown, this had to happen eventually.Â
I recall sitting on a panel at at outsourcing conference in New York City back in 2004, and there were protesters outside, demonstrating their frustration about US jobs “moving offshore”. In response, a sourcing attorney declared, “outsourcing provides a great opportunity for the US - we can offload low-value jobs and focus on higher-value, more innovative work”. I recall thinking to myself, even then, that that argument didn’t quite add up.Â
While it sounds like a nirvana, the reality is we’re competing globally for labor, for making cheaper, better cars, for delivering good quality IT services, for delivering quality finance, HR and supply chain support. If the US is to truly deliver “higher-value”, the government needs to invest in education programs that develop this talent. The reality is that the rest of the world caught up. People in Chennai, Manila, Bucharest, Guatemala City, Guangzhou etc are being trained to compete with American, British, French and German workers, and the Internet and new technology have been a huge enabler to make this happen. A good friend who works for one of the leading India-based BPOs confided in me recently, ”we should bring over the training leaders from the top Indian outsourcers and have them work with US businesses to get their act together”.
What continues to irk me, is the fact that industry has become so focused on making its quarterly numbers that it has taken its eye off the long-term picture. We saw this financial meltdown coming - and did nothing (wasn’t the Asian crisis of the ’90s warning enough?). We are seeing further deterioration of the environment - and still do little. We saw the US automotive industry grind down to its current predicament - and have done nothing. And we are seeing the IT and BPO industry rapidly develop across the globe - and have blissfully ignored it to meet these cost-containment targets.Â
And how to we respond? Bailouts.  We’re now talking about bailing out the flagging automotive industry. How did it come to this? Years of greed, a deterioration of our work-ethics, and eager developing nations eager to get a taste of what we have. It’s as if we had a major cardiac arrest and are now hoping we can recover fully from open-heart surgery.Â
And this time when we do recover (and we will), we simply have to make sure this never happens again. Some will argue this is all about natural economics of globalization and a free market - and they are probably right. However, this time we have truly reached an inflection point.Â
It’s about accepting we now operate in a global economy and that we are competing at a level where we need to work as hard, and as smart, as the next nation.  I hope President-Elect Obama can help instill a new work culture in the US. The US people have spoken that they want change, and they have voted in a President promising change. The core question now is whether they are really prepared to change.
October 18th, 2008
Can the next President turn the USA into a competitive sourcing location
We’re in the final throes of the most enthralling and contentious election in years - and John McCain or Barack Obama will likely have a very different impact on the
USA’s potential as a sourcing location.
With the financial crisis upon us and a troubled economic period in store for the medium-term, higher unemployment, a weak dollar and lower labor costs are combining to increase the attractiveness of low-cost USA locations for global services. We have already seen leading offshore service providers significantly bolstering their onshore US presence, with, for example, TCS establishing a major service delivery facility in Cincinnati, Infosys in New Jersey, Wipro in Atlanta and Cognizant in Phoenix.  Offshore services must be augmented with client-facing onshore services, however, with the onshore costs lowering and new (potential) government policies to encourage US business to keep jobs stateside, we could see the USA emerge as a highly attractive sourcing location for global services providers.
What is clear, is that shipping jobs offshore isn’t necessary very good for the US unemployment rate - the age-old argument of focusing US staff on “higher-value” work is wearing a bit thin these days. What’s more, many offshore service providers are now focused on taking on more higher-value work activities for their clients, in addition to routine transaction work. For example, once you have your general ledger run from a service provider in, say Chennai, what is now stopping that provider taking on higher-value accounting services, such as budgeting/forecasting and business intelligence? That provider basically ownsand understands much of the revenue cycle of that client, hence the natural next step is to move up the process value chain. And if your current provider won’t move up the value-chain, there is a proliferation of KPO providers willing and ready to take on higher-value offshore work. Moreover, while a firm may have been enjoying good quality COBOL programming from Brazil, what’s stopping that provider offering systems architecture work for their client, which is among the costliest onshore IT services?
We’ve now been sucked into a global employment war for sourcing services, and from what Mr Obama ha stated this week, he intends to give US firms tax-breaks to source work onshore. While he hasn’t yet outlined exactly how he plans to do this, it is likely that he initially plans to provide benefits for buyers, as opposed to the providers, to source work to onshore US locations. This is the opposite strategy of the Indian government’s STPI (Software Technology Parks of India) tax scheme, which gives tax-breaks to new Indian organizations (mainly suppliers) in the region of 10-20% for their first 10 years of inception, designed primarily to bolster its software industry, but also directly applies to its service providers.Â
Look at it this way, you can hire staff in low-cost US locations for a low as $25K a year for back-office administrative work. If you can reduce that further, to $22K a year as a result of tax incentives, and the cost of health-care is reduced/subsidized, the price differential with locations such as Lat-am and India is minimal. IT, on the other hand, is significantly cheaper in locations such as India and China for all levels of services.
Here’s my take:Â
For BPO services, the US is still in the game. The issues surrounding client / employee contact still favor onshore services (even though offshore services are improving by the day), plus the fact that there is still a great supply of mid-level executives who will be anxious to keep their jobs in the forthcoming months. With significant incentives to keep work onshore, I can see the US stepping up as a serious BPO location. Not a bad thing for the BPO industry, as long as the service providers invest wisely in attaining the right onshore/offshore balance within their delivery infrastructures. Moreover, the onus on sourcing we’re going to see from the restructuring financial services industry is going to entail a delicate balance of onshore/offshore BPO work. If the major financial services firms struggle to sell off their Indian captives, we may well see several of them scale-down their offshore dependence and seek onshore services as an alternative.
For IT services, it’s looking a bit late to pull much of this back. In India, for example, IT services have become the life-blood of the country’s economy, and the skills in basic programming are widely available for mainstream applications. Even if US wage rates for programming work come down significantly, there is also a major issue with the fact that the quality of many IT services delivered from offshore locations is now consistent. The core battle is with services needed from business-process architects and staff with deep industry-specific expertise. We have seen many of the leading offshore providers invest in their onshore deliver centers over the last year - and we can expect to see continued significant competition between the incumbents and offshore providers in the coming months for onshore-related work.
July 23rd, 2008
Preparing the new organization for life after outsourcing
I wanted to share an article from last year that discusses how enterprises today can better prepare their key staff for life after outsourcing:Â
The outsourcing debate over recent years has been dominated by the operational ability of companies to transition processes to a third-party supplier to manage. Too many companies have presumed their business will carry on as it was pre-outsourcing, but with third-party staff managing some of the business functions. However, in the majority of outsourcing efforts there is a degree of employee transition, and when this happens there are leading practices for both transitioning and restructuring the retained organization.
Experience demonstrates that those companies that proactively prepare their management effectively to:
(1) Modify their roles, responsibilities, and management styles,
(2) View outsourcing as a strategic tool,
(3) Learn new skills, and
(4) Change their daily routine…
…are those that are able to achieve value from an outsourced environment.
The full article is featured in Crossing media’s HROToday magazine, and can be accessed here
June 18th, 2008
Outsourcing highlights for June
Click on these links for recent happenings in the outsourcing world:
A final word from India: moving beyond “old BPO”
Musings from abroad: Futuristic BPO
The Legacy of Global Sourcing – What is (Y)our Legacy?
NASSCOM dispatch: “We’re now past the era of BPO” (Pramod Bhasin)
How do you feel about Human Resource Professional Organizations?
Musings from abroad… dispatch #3… Indian drivers
BPO: It’s all about taking ownership to get results
IBM/Bristol-Meyers: a shot in the arm for HRO
Finance and Accounting BPO continues its growth path
HRO Redux: 8/10 buyers don’t look back, while the vendors look ahead
BPO partnerships are opportunistic, rarely strategic
Will the EDS acquisition spark a BPO feeding frenzy?
Whom do you trust for balanced outsourcing advice?
Is it time to dump the term “outsourcing”?
Are we reaching an inflection point of business globalization?
Quest for an Organic Approach to Offshore Outsourcing
Cost-cutting measures for troubled companies in these tough economic times
Blog-culture is ripping up the rule book for the outsourcing services and technology media industry
Taking control of your vendor relationship
Can outsourcing be a catalyst for driving down the cost of healthcare?
May 18th, 2008
Will the EDS acquisition spark a feeding frenzy?
So HP acquired EDS. Wow. Biggest services news since HP acquired Compaq a week before 9/11? In my opinion it is, anyway.
We discussed here in January the issue of consolidation among large outsourcing suppliers, and the general view was one that we would be unlikely to see acquisition among services firms that were similar in nature:
Outsourcers like to acquire firms that bring something new to the table to enhance their outsourcing offerings - for example new technologies, or a niche expertise that gives them competitive advantage. Too many large outsourcers are too similar… they overlap too much and a merger would often end up as an unprofitable exercise and result in a mass exodus of key talent.
So the HP / EDS merger goes against the grain. We noted some specific areas where there are some strong complimentary offerings - namely in BPO areas - but the overwhelming motive for the merger is one of scale and going-big to compete more effectively with IBM. The increased BPO delivery capability also puts HP on a firmer footing against the other global BPOs, namely Accenture, ACS, Capgemini, Infosys, Wipro and TCS. The newly-merged entity needs to examine how it builds out its business consulting and transformation expertise further if it wants to challenge the both IBM and Accenture’s BPO market leadership.
This merger-event could change the game considerably, and we could see other BPO suppliers to re-evaluate their acquisition strategies to generate more global scale and increase their client-bases. With the cost of client acquisition becoming increasingly prohibitive, the valuations of services firms decreasing in these market conditions, and the desire of many enterprises to move into more rapid outsourcing engagements, the leading vendors need additional scale and capacity.  So this begs the question whether we could see some similar-scale outsourcing services mergers in the near-term?Â
Please vote on the toolbar to the left whom you think is likely to be acquired over the next year - you can have up to three choices.Â
May 10th, 2008
Whom do you trust for balanced outsourcing advice?
I wrote a piece entitled “Blog-culture is ripping up the rule book for the outsourcing services and technology media industry” a few weeks’ ago which raised a few eyebrows. OK, it’s a litttle biased and I was on my high-horse, but it did raise several questions on where people go to get balanced, insightful information on the outsourcing industry that they can rely on. So, please vote here for your preferred three information outlets on the poll to the left side-bar. And please be honest 
May 3rd, 2008
Are we reaching an inflection point of business globalization?
Are we reaching an inflection point of business globalization?
April 25th, 2008
Outsourcing highlights for April
Highlights from the award-winning outsourcing blog Horses for Sources for the month of April:
Quest for an Organic Approach to Offshore Outsourcing
Cost-cutting measures for troubled companies in these tough economic times
How severely will the expiration of India’s STPI tax scheme impact the Indian outsourcing industry?
March madness: little advisors, Starbucks redux, F&A is bubbling back… and EDS gets active
HROWorld 2008: An industry re-inventing itself
Blog-culture is ripping up the rule book for the outsourcing services and technology media industry
Phil Fersht is an acknowledged and well-recognized industry analyst and advisor across Business Process Outsourcing (BPO) and IT services worldwide. See his full profile and disclosure of his industry affiliations.
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Recent Entries
- 2010 Predictions for the Outsourcing Industry
- The change imperative: it’s back-to-basics time
- Can the next President turn the USA into a competitive sourcing location
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