Outsourcing is exploding, with new vendors scurrying onto an increasingly competitive landscape, and the “hot stuff” offerings of yesterday are becoming standardized fare today. Selective outsourcing is on the rise, creating new opportunities for niche players and increased competition for the traditional big vendors. Added to this mix are more experienced customers who shed their naivete with their first round outsourcing agreements and are moving into their second round agreements with a better understanding of what they do and do not want.
That, in a nutshell, is the industry overview, as seen by Dean Davison, analyst with the Meta Group.
“Some of the hot things from a few years ago, such as SAP implementation, are now pretty standardized,” said Davison. “There are new things, like internet services and SAP operational services, coming out. Maybe the biggest impact is that outsourcing is going from something some people do into proliferating — maybe not completely in 1998, but definitely by the year 2000 — into just about every IT organization.”
That surge has created a situation where IT organizations must go beyond considering the suggestion of outsourcing to making the ability to outsource some function of their IT operation a core competency. The questions then become how the organizations achieve that goal and how they make such moves successfully.
Competition Heating Up
Increased competition is another piece of this shifting outsourcing picture, according to Davison. He points to the fact that the many new players entering the market include niche players.
“They come in and price their services aggressively, and they do good work,” he said. “As IT organizations become increasingly sophisticated at selective outsourcing — which is outsourcing a piece of the IT operation — then those types of vendors become increasingly attractive. That leaves the traditional players struggling to reposition the way that they deliver services to compete at that level and with those types of providers.”
The Customer Knows Best
The capability of outsourcing selectively is only one element in the emergence of a more enlightened customer base. IT organizations, rather than boards of directors, are buying the outsourcing services now, and Davison said they are becoming shrewder about making the purchases.
“IT organizations are no longer the novices they once were in outsourcing,” he said. “During the past five years, tens of thousands of IT organizations went through their first outsourcing exercises. Frankly, many of them are very unhappy. In our customer base, roughly 60 percent of the people who are outsourcing are moderately to very dissatisfied with their results.”
That dissatisfaction, he said, stems from mistakes made either in the reasons for outsourcing, the vendor selection process or contract negotiations. Now those professionals, veterans of a first unhappy experience, are starting to do their second outsourcing engagements, and they are better prepared.
“This time, they are far smarter, and they understand it,” said Davison. “Maybe they still don’t know the answers, but they understand what they didn’t know before. They aren’t naive.”
Growth at Home and Abroad
While increased competition and a better informed customer base provide new challenges for vendors, the sheer demand for outsourcing creates a staggering array of opportunities, both within and beyond North America. Davison sees big growth in the international outsourcing marketplace in two areas. One is the growth of North American companies that have international operations. The other is the increasing popularity of outsourcing with non-North-American-based companies. The international relationships differ somewhat from the North American ones, according to Davison.
“In North America, we still see the procurement process as being the key driver — competitive bidding and that type activity to make sure you get the best deal,” he said. “In Europe especially, it continues to be more of a relationship business — who knows whom and who can make things happen. Some of the traditional European mentalities continue to play in the market, and oftentimes, they are less competitive or grueling.”
Internet network outsourcing is another area that offers tremendous opportunities for growth.
“It’s absolutely exploding,” said Davison. “The last forecast I saw was that it was going to be $10 billion by the year 2000.”
And as internet networking and other aspects of IT go, so goes outsourcing.
“People have asked me to define outsourcing,” said Davison. “Look at all the services IT provides, all the things IT does, all the capabilities IT possesses — Outsourcing is just a shadow of that. It’s those same things. When you try to generalize, it becomes difficult.”