As the outsourcing industry heads into 1999, Richard Raysman, an attorney with the New York firm of Brown Raysman Millstein Felder and Steiner LLP, expects to see not only larger transactions, but an expansion of the services being outsourced. “Companies looking to stick to their core competencies and outsource their non-core competencies are looking to include more in the outsourcing arena,” he says. “Now that companies have outsourced many of their information technology (IT) functions, I see them getting into the telecommunications area when they look for new areas to outsource.”
Another area in which Raysman predicts growth is the resolution of Y2K issues. “It’s a way of leaving the legacy systems behind and switching over to systems that are proven to be Y2K compliant, so that companies are really getting rid of their Y2K problems by siding with outsourcers,” he says. “As the time approaches for Y2K problems to be finally resolved, I think more companies are going to outsource for that reason, particularly smaller savings and loan associations or insurance companies that don’t have the resources to fix their Y2K problems.”
Beyond the two major areas of IT and telecommunications, Raysman expects growth in established support functions such as data centers and help desks. However, he also expects to see an increase of outsourcing in manufacturing. He notes that even in IT transactions some companies are outsourcing their engineering function. He believes companies now are looking to outsource some manufacturing areas to vendors who have expertise the customer might not have in those areas.
As an example, he mentions automobile manufacturers outsourcing the construction of cartons needed in their operation.
As examples of other new activity, he cites cafeteria operation and office services, such as photocopying and messenger services, as areas where “companies are looking to save money and get better value and get rid of parts of the companies that are not in the core competencies.”
The Internet/Intranet Arena
He foresees significant activity in the Internet/intranet outsourcing arena. “They are part of the overall network outsourcing,” says Raysman. “They’re growing activities, since companies are still sort of feeling their way around the Internet. I don’t think it is as prevalent as some of the other outsourcing activities, but outsourcing is a way to ratchet up technologically very quickly, instead of companies’ developing their own competency in that area.”
Companies, he says, will outsource their entire Internet/intranet functions, with certain restrictions. “Companies are very concerned about security,” says Raysman, “so security is going to be one of the major areas in outsourcing of Internet and intranet activities. Raysman, “but I do not see companies performing that function themselves, because they just don’t know how to do it.”
Although Raysman expects the growth of outsourcing to remain ‘at least steady’ in 1999, he says the economic downturn that has been forecast could affect the industry in three ways. Companies may delay transactions for several months until they see which way the economy is going, they may turn to outsourcing as a way to cut expenses, or they may move to take advantage of the initial benefit to the bottom line that outsourcing frequently offers. The monies the customer receives when equipment is transferred to the outsourcer and the ‘opportunity fee’ some vendors pay for being able to sign a contract with the company can be a significant source of income, according to Raysman.
“So those two checks can be beneficial to the bottom line of a company that might be having some lower earnings in a particular year,” he says. “If 1999 turns out to be a bad year, that would certainly be an encouragement for companies to outsource.”
International vs. U.S. Growth
The highest growth rate, according to Raysman, will be in the international marketplace, because that arena has not been developed as much as the U.S. domestic market. He expects the Euro, the new monetary unit, to drive growth in Europe. “The U.K. is an area that has been successfully mined to some extent in outsourcing,” he says, “but I think we are going to see France, Germany and Italy, for example, as potential areas for much greater growth than they’ve seen in the past in outsourcing.”
The Vendor Landscape
He expects that international growth to result in some alliances among vendors in countries other than the U.S. The biggest players, he says, will be “everybody we already know.” Domestically, that includes AT&T, Andersen Consulting, IBM, CSC and Alltel. He lists British Telecom as one of the biggest players in the international telecommunications area.
Along with the alliances, Raysman sees other significant shifts in the vendor community. Major vendors, he says, are evaluating their outsourcing businesses to determine what should be retained and what should be sold to other vendors. They also are looking for smaller outsourcing vendors to acquire. “I think we’re going to see fairly significant changes in the sales of outsourcing businesses back and forth among vendors,” says Raysman.
What’s Happening in Relationships
As outsourcing expands into new activities and the vendor landscape shifts, Raysman also sees significant changes in the relationships themselves. He expects ‘a number of renegotiations’ for existing relationships, as relationships mature and circumstances change. Those renegotiations will center around pricing, service levels, and possibly scope of the relationships.
Dissatisfaction, he says, is driving another change, as both customers and vendors are beginning to pay more attention to management of the relationship. Vendors are going to have more people on site to make sure the relationship is being managed and to catch issues that arise at an early stage before they ‘fester’ with the customer and the users.
“Both sides are looking to spend more time managing that relationship,” says Raysman. “I think that is a fairly new trend.”