Compass Points to Growth and Maturation | Article

CompassThe view for the coming year is bright, with growth forecast at more than 20 percent, according to managers at COMPASS America, Inc. As the global economy tightens up, “the downturn in the economy will force cost back to the forefront of outsourcing drivers,” says Syd Hutchison, senior consultant. Adds Geraldine Fox, senior consultant, “the Asian market meltdown has made it more difficult to get senior executives to concentrate on IT issues, and companies may be a bit more cautious.”

Partnership Spirit Grows

The cautionary environment won’t significantly erode the growth in the outsourcing industry, however. Caution is manifesting itself in a definite trend toward partnerships. The most effective outsourcing deals have been where the vendor is considered a partner and part of the organization rather than just a provider of services. Fox notes, “In creating a virtual organization made up of internal staff and one or more vendors, it can only succeed in an environment of trust and partnership.” She does not believe adversarial relationships will be effective.

More Deliberate Pace

Fox also notes that clients are taking a lot more time in the vendor selection and decision-making processes. “It’s a process where the client becomes an informed consumer,” she says. Sometimes the final outcome is a decision not to outsource, but the clients are finding the six-month (or longer) period of discovery worthwhile.

Contracts Getting Better

Another trend expected to continue is the emergence of better outsourcing contracts. “They will be priced differently, and structured differently,” says Fox. This is especially true as clients outsource internal operations that haven’t been subjected to cost analysis and justification, such as application development or client-server outsourcing. “One of the major critical success factors in a good relationship is a tight contract,” asserts Fox.

Clients have to view outsourcing as a long-term arrangement. “Nobody ever wants to have to take services back in house,” observes Fox, “so clients are becoming more careful about long-term deals.” While the agreement may be for a 10-year period, more clients insist on renegotiations after three or five years. Another factor that is increasingly evident is the involvement of senior management in the contract negotiation process. “The participation of senior management in sponsoring negotiations and structuring the deal helps ensure that the provider understands the significance of their role, and helps promote a spirit of partnership and trust,” says Fox.

“Contracts are also improving from ‘make it up as you go’ to assigning responsibilities in black and white,” says Hutchison. A clearer definition of roles and responsibilities makes the process more formal, and eliminates the need for a new manager to re-invent the wheel. Also, it helps the parties manage the relationship on an ongoing basis. Other contract improvements include a move away from penalties toward incentives. Says Hutchison, “We see more use of the carrot rather than the stick, and more encouragement to improve the business and add to the bottom line.”

One aspect that some clients overlook is the need to retain adequate management expertise within the organization. This is essential not only for managing the relationship, but also in order to evaluate the added value of the outsourcing arrangement.

New Mega-Deals

Another sign of the maturing outsourcing market is the trend away from mega-deals with a single vendor. Looking forward, Fox expects to see more selective outsourcing arrangements involving a consortium of providers. “Not all vendors do everything well,” Fox notes, “and we anticipate an approach where the best-of-breed in data centers, for example, will partner with a major application development outsourcer,” and come forward with a combined deal featuring their respective strengths.

A Cautionary Note

The only cloud on the horizon may be Y2K. Fox and Hutchison both agree that outsourcing in the middle of a Y2K problem may slow things down a bit. “I can’t see anybody outsourcing in the last six months unless they know they’ve totally botched it and they’re trying to find a scapegoat,” laughs Hutchison.

New Growth

Despite possible distraction regarding Y2K, two areas offer promising growth. First, the Internet and intranet applications are being outsourced aggressively as value-added services. On the international scene, as the European economy settles on a unified currency, Fox and Hutchison expect to see a wave of corporate merger activity, which would be followed by increased outsourcing activity.

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