In 1999, the outsourcing industry will change directions, moving away from its old legacy focus and becoming more of an instrument for gaining access to new areas such as SAP, mail messaging and electronic commerce solutions. That’s the view from Compaq Computer Corp., according to Wendell Jones, vice president, operations management services, and Nigel Bufton, worldwide business development and marketing, operations management services.
We see a trend of market and risk minimization being driving factors, with cost always there but increasingly less important as we are in expansionary areas,” says Bufton. “We may see some of the outsourcing-for-cost structure environments, but for most of the market — Europe, the U.S. and Canada, particularly — we see it continuing to be a strategic enabler. “This evolving environment, according to Bufton, is opening the door to more outsourcing work with middle-sized companies, ranging from 2,000 to 8,000 employees, companies that don’t have a ‘must do it inside culture.’ “They will go more to sourcing for rapid enablement of capability and capacity.” That expansion of the mid-range market will have significant impact on outsourcing, say Bufton and Jones. Jones calls it a factor in industry growth in Europe. “There are a lot of companies in Europe in that size range,” he says. “From everything that I read, the growth curve there is going to be even steeper than it is in the U.S.”
And the U.S. remains very strong, adds Bufton. “The U.S. is in one of these phases where the birth and growth of medium and small companies rapidly is very fertile,” he says. “A lot of these folks need a lot of help.”
As part of that trend toward mid-range outsourcing, the SAP rental market is growing, and Internet service providers (ISPs) are looking to become application service providers as cable companies ‘swallow up people’s Internet access,’ according to Bufton. Those companies are coming out with offers modeled after the old service bureau way of decentralized outsourcing.
“So we are seeing a rebirth of a much different but fundamentally similar time-sharing model as a way for people to execute their sourcing strategies,” says Bufton. “And ISPs are getting into this in a big way to get up the value chain, because providing more Internet access is what the telephone and cable companies are going to do.”
Compaq also is moving away from legacy environments through the company’s FutureSourcing philosophy. “We want to manage the environments that people are moving to,” says Bufton. “Those are predominantly around NT, UNIX, Internet, electronic commerce, SAP, the whole integration of the desktop community into front office/back office unified IT infrastructures.”
They have moved into the service bureau area with offers in SAP and a utility built around Microsoft Exchange for companies that want to source their mail messaging infrastructure. Both offers have received ‘tremendous market acceptance,’ according to Bufton.
Both men expect Internet-related activities to be outsourced heavily. “It’s like the old realtor thing –location, location, location,” says Jones. “In our business, it is Internet, Internet, Internet.”
The move beyond outsourcing’s legacy systems also is driving a change in relationship structures, according to Bufton. Customers are leaving the single source relationships for best-in-breed, multiple supplier arrangements or prime contractor arrangements which are a hybrid of single source and multiple vendor structures. They also are looking for flexibility in the contracts.
“As technology moves faster and faster, people’s ideas of what they want to do with it moves faster and faster,” says Bufton. “So the astute client is looking for the outsourcing vendor to draft a contract that anticipates change and is able to accommodate change swiftly without rewriting the contract every time there is a technology shift.”
Bufton and Jones agree that local economic trends, whether recession or expansion, will drive outsourcing in 1999. In recession areas, the impetus will be cost control, and in an expanding economy, companies will turn to outsourcing for growth.
Beyond those basics, the globalization of IT adds another economic factor, prompting companies to study how they can support a global community and whether working with sourcing partners is the answer for their operations. “The Internet, together with economic expansion and increased competition for multi-national companies and new companies, is going to be very interesting,” says Bufton.
A Global Perspective
Jones adds another aspect to the globalization issue. “One thing I’m noticing is this growth in global customers,” he says. “It is not at all unlikely that we will be talking to a U.K. company and the biggest piece of business is in the U.S., or we are talking to a U.S. company and their biggest subsidiary happens to be in the U.K. or somewhere else.”
In looking at that international market, Bufton says Eastern Europe is particularly interesting. “We are seeing good opportunities there. We believe that they will be adopting outsourcing increasingly as they merge with Western Europe and become an economic player,” he says.
In Asia, he expects opportunities in Malaysia, South Korea, and maybe the Philippines. “Australia still stays reasonably strong with the privatization efforts that have gone on over there,” he says. “Japan continues to be an interesting market, both from the perspective of its business culture and from its current financial situation. I think most of the outsourcing vendors are keeping a foot in Japan but not looking for anything dramatic to happen there.”
Areas of Concern
Although they consider the outsourcing industry to be healthy, Bufton and Jones share some concerns. One is that the unstable economy will push companies into selecting vendors based on the lowest costs. That, they say, could result in expectations not being met.
Although the Y2K issue offers some opportunities for outsourcing, Bufton says it also is an area of concern.† Many CIOs, he says are being less than honest with their management team about their progress in Y2K work. “I think some of them know how dangerous it is and are keeping their fingers cross and hope they pull it off,” he says, “but they’re not being truly honest. So we might see Y2K have a negative impact on the IT industry if there are severe issues as we move closer to the Y2K deadline.”
Then there is the labor shortage problem, although that is a good news/bad news situation, according to Bufton and Jones. The good news is that advanced tools, particularly in the area of centralized services, now make it possible to increase the productivity of people per unit of IT services delivered.
One of Bufton’s chief concerns is the nature of outsourcing relationships.
“A lot of people don’t understand the true impact of the meaning of the word relationship in outsourcing,” he says. “It’s amazing how many people will repeatedly say an outsourcing relationship is like a marriage and then move on to articulate thoughts that have absolutely nothing to do with the way one would approach a marriage. You have to have the common interest, the common objective, the constant communication, the addressing of issues proactively, a spirit of cooperation and enablement.
“Maybe,” he says, “Men Are From Mars and Women Are From Venus is an outsourcing book.”