December 20th, 2007
Outsourcing Predictions for 2008... in a nutshell
Let’s not beat around the bush…here’s what happening next year in the “O” world:
1) Offshoring panic will continue, but will force providers to innovate. Concerns over the appreciating rupee, weakening dollar, wage inflation and employee attrition will continue to have a powerful impact on the global outsourcing industry. The onus on the leading outsourcing providers is to focus on building constant ongoing efficiency and dynamic working environments for their staff, price their engagements on business services as opposed to offshore staff wages, and expand their delivery centers into other low-cost global locales like Latin America, Philippines and South East Asia to minimize the risk from their offshore delivery models.
2) The standardization of technology platforms within Business Process Outsourcing (BPO) engagements will take center stage. You have to take your hat off to SAP for recognizing the significant opportunity BPO is providing for the leading ERP vendors. They invested significantly in implementing programs for the BPO service providers to deliver outsourced services on their platform three years’ ago, recognizing that the future success of BPO lies in standardizing processes across business functions and global regions. And how else can you do that without having common processes underpinned by standardized technology platforms? Oracle has also followed suit more recently, as it too has realized it must compete for business with firms looking to moved towards an outsourced end-state. To put it quite simply, when you are moving processes into the hands of a third party, or offshore, it is much easier to train staff to manage these process for you if they are well documented and are underpinned by software that staff can be quickly trained to use. It is much easier to find staff who are, for example, familiar with running reports from Oracle financials, or SAP R/3, which significantly lowers the risk of staff attrition, and also allows for outsourcing providers to hire fresh graduates and train them on standard tools and processes, many of which they already gained experience with during college, or in their previous employment.
3) Intense competition among the IT Outsourcing vendors will drive the uptake of Remote Infrastructure Management (RIM). Up until this year, the growth of RIM - the management of a company’s databases, desktops, servers, networks, security and applications from a remote location - has been timid. However, with the majority of IT infrastructure now manageable from a remote location, it is making less sense for firms to engage in outsourcing engagements where the vendors supply all the kit. Of course, vendors can command higher fees if they are also supplying the hardware and applications, but they are also footing the bill for asset depreciation and renewal. With so many vendors competing for a piece of the ITO pie, RIM provides an aggressive entry point for the ambitious offshore providers, for example Satyam, HCL, Patni and Cognizant, to compete with the traditional incumbent ITO vendors. These companies will be prepared to bid for much smaller contracts to gain a foothold in the market and build operational scale (remember the 90’s when the US IT services giants unwittingly let Wipro, Infosys and TCS jump into the IT services game…). What’s more, enterprises can explore RIM solutions on a piecemeal basis and do not have to go for a “big-bang” approach; outsourcing solutions have often proved more successful where firms can try out one or two processes to begin with.
4) Adoption of Business Process Outsourcing will continue to grow, but at a slower - more cautious pace. The early wave of Human Resources Outsourcing (HRO) deals was centered on multiple processes across multiple geographies being bundled in a single contract, where the HRO provider delivered multi-lingual services and often multiple technology platforms. 2007 pretty much signaled the end of an era, with the J&J / Convergys HRO engagement being the only end-to-end HRO global mega-deal of note. However, we did see a plethora of smaller-scope engagements which covered payroll, benefits administration and HR-IT areas. Expect these to continue in 2008 as providers refine their delivery models and include more offshore services to support HR processes, but the day of the large, global, complex HRO engagement is very much fading.
Finance & Accounting Outsourcing (FAO) has enjoyed unprecedented growth over the last three years as firms take advantage of low-cost offshore services. However, 2008 will see a slowdown in the 30%+ growth spurt as the leading providers ingest a lot of the recent business they have taken on, and look to build efficiencies in their delivery models that take advantage of better technology, more standardized processes, and incorporate new locations - namely Latin America. Expect more modest growth in 2008, in the region of 10%.
Procurement Outsourcing (PO) will continue to be adopted at a slow, but steady pace, and will be increasingly bundled onto existing FAO engagements as many of the more experienced adopters seek to add more indirect spend management processes into their outsourced portfoilio of services. Like HRO, the offshore vendors are learning how to service these processes more effectively, and expect this to be a driver for more adoption next year.
5) An economic downturn will accelerate some outsourcing adoption. As we discussed here, each outsourcing inflection point has been driven by urgent financial needs of companies to curtail expenditure on general and administrative functions. 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. Outsourcing 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? I believe it is…
One of the toughest years to predict?
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.
