December 16th, 2007
Will an economic downturn spark a new wave of outsourcing growth?
These are interesting times in the outsourcing world, as typified by Peter Allen’s post last week, where he mentions sporadic, stuttering growth as the leading Indian providers look to gain footholds in the market, and a slowdown in the number of mega-outsourcing deals being signed with the incumbent outsourcing behemoths. However, we have to look at the underlying drivers behind outsourcing to understand what is going on:
1) Large global enterprises are taking a gradual approach to outsourcing growth. Most of the FORTUNE 1000 enterprises have their own offshore captives and want to optimize what they have internally before moving more processes over to a third party provider. Whereas IT outsourcing is relatively mature, the approach of most global enterprises towards BPO is still cautious. Bottom-line, firms are still exploring which processes are appropriate for outsourcing, versus ones they should keep inhouse.
2) The service delivery landscape is still maturing. Whereas moving administrative processes like payroll, accounts payable, benefits admin, loans/claims processing is now a slam-dunk, the onus is moving towards companies sending out higher-value - and higher-cost - process to third-parties that require some degree of business insight, executive contact and critical-thinking. The financial business cases to outsource are normally very compelling when examined on a straight cost/employee basis, but the bigger issue is the capability of the outsourcing provider to take on these services, and the expertise of the buyer to execute an outsourcing transition successfully and design a retained infrastructure. While the value proposition is there, the service provider landscape is still in the phase of provingits capability do deliver. Remember, it took the ITO industry 20 years to get to a stage of relative maturity, and true BPO is barely a decade old.
3) The recent years of economic prosperity have eroded the urgency of many buyers. Each outsourcing “wave” has been driven by urgent financial needs of companies to curtail expenditure on SG&A. The waves of ITO deals in the early ’90s, HRO and ITO deals after 9/11, were primarily driven by the need for buyers to experience a “quick fix” with their costs, combined with ambitious provider pricing designed to have immediate financial benefit to clients. The more recent wave of FAO deals has been driven by manufacturing, automotive and consumer businesses under serious competitive pressures. However, the relative economic comfort of recent years has allowed many enterprises to take more time over their sourcing decisions, and adopt a more “start-small” exploratory approach to understand what works for them. When you look at the anatomy of outsourcing expenditure over the last couple of years, we have seen a surge in smaller contracts that do not make the media radar. BPO is a complex business, so why should a company enter into huge multiple-process outsourcing engagements, when it can afford to take it’s time a move out select functions on an incremental basis. However, as we stare hard at the prospect of an economic downturn in 2008, will we see companies step up their urgency to cut costs? Is the maturing provider landscape ready to take on a new wave of more complex services?
History has so far proven that outsourcing has been aggressively driven by companies in financial distress during economic downturns. This time, we may be about to witness the coming together of enterprise needs and service provider delivery capability. Have your say and vote on the poll…
Is the outsourcing industry primed to grow in a downturn? Have your say….
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.
