A Quiet Revolution | Article

box with computer partsOutsourcing has sparked a revolution that is “transforming business as we know it,” says Kevin Campbell, a partner in the Atlanta office of Ernst & Young. His clients are examining the way they have competed during the last decade and now are choosing to change their fundamental business model. “Outsourcing will continue to become an increasingly important strategic tool for CEOs as they restructure and transform their businesses,” he observes.

That’s because the costly barriers of time and distance are dissolving in ways we never thought possible, he observes. The Internet has made many solutions possible that were unthinkable just five years ago. “We’ve got more change than we’ve ever seen in front of us,” he notes.

Campbell believes the altering landscape will provide the opportunity for outsourcing to become inventive. Companies will continue to use creative outsourcing to expand into new geographic areas as well as new markets.

The new possibilities have also created new challenges. Today, according to Campbell, companies need to compete on a global playing field. The Internet has made it economically feasible for competitors on the other side of the globe to compete for your business. “E-commerce presents both an opportunity and a threat,” says Campbell. Corporations today face continued stiff competition for what he labels the consumer’s mind share.”

The Internet has educated consumers, which can make a corporation’s job harder. “Consumer purchasing power will force companies to find value added services and unique ways to compete other than price,” Campbell notes.

For these reasons, Campbell predicts that outsourcing will continue to grow at double-digit rates. Ernst & Young anticipates its outsourcing revenues will increase 100 percent over 1999’s income.

An ASP Shake Out

Campbell expects a shake out in the ASP arena as lots of firms work to capture this market. The newer ASP providers will mature; he predicts there will be some consolidation in this sector. “This year there will be a lot of fall out and combinations among the ‘upstart’ ASP companies that merits watching,” he says.

In addition, ASP providers will have to offer industry tailored solutions since they have never been able to install generic software successfully.

He also predicts the industry will start to sell packaged pre-assembled solutions including Outsource Business Process. A typical scenario: A new dot.com company chooses to outsource its IT and accounting functions. But instead of finding a company that can balance the general ledger, the dot.com will select a provider that can install and manage the software, too. “That’s a migration from ASP to BPO,” he points out.

He believes this amalgam — the fusing of traditional outsourcing with the new ASP offerings to create pre-assembled solutions that include BPO — is the biggest single trend for 2000. For example, he expects to see an offering for high growth companies that provides complete back office services in a one-to-many fashion.

Another outsourcing growth market will be vertical solutions for the business-to-business market. Examples include complete business solutions for a supply chain in a particular market or solutions targeted as part of a restructuring industry.

Independence or Spin-Off?

Accounting firms that have consulting practices face some major transformations, mandated by both the federal government and the changing marketplace. The Securities and Exchange Commission (SEC) is concerned about the independence of the two divisions and may insist on specific controls if they stay under one roof, according to Campbell.

Rapidly increasing capital requirements are mandating the second change. As the deals grow larger, so do the demands on capital. “The partnership structure is no longer the most efficient way to raise capital for any company that wants to compete in the new connected economy. Today, bigger bets are required,” reports Campbell.

Finally, the new dot.com companies, whose stock prices have soared through the stratosphere, have created a new form of compensation. Key employees expect stock options. Competing, attracting and retaining the best people require compensation besides salary. For that reason, the Ernst & Young partner believes offering an IPO for the consulting unit may be the best solution to all three problems.

Campbell also sees new trends in the ways suppliers and customers interact. Today, the parties are tired of the traditional fee-for-service level contracts. Instead, they are formulating contracts that have mutual incentives and shared risks and rewards.† Ernst & Young has already inked three deals where the firm’s payment will be based on their partners’ sales. In addition, the firm received equity in the partners’ companies. Other new metrics include pricing by users or by transaction.

These innovative new structures fit well into Ernst & Young’s history of joint ventures. Campbell estimates half of the firm’s outsourcing transactions are joint ventures. And that number is growing, he reports.

Campbell feels these types of arrangements will enjoy a more sanguine outcome. “Putting our own dollars on the line ensures that each side has similar motivations,” he says.

“A new day is dawning in outsourcing.† We see the signs that 2000 will mark a new decade as well as a new era in outsourcing. This is truly a time when outsourcing professionals should be able to jump out of bed each morning with a drive to make a lasting impression. There’s never been a better time to be in the outsourcing industry – from both the customer and the provider perspective,” he concludes.

Lessons from the Outsourcing Primer:

  • Outsourcing is a strategic tool for change.
  • ASP will migrate into BPO solutions.
  • The Big Five accounting firms are considering going public to attract and retain employees and generate more investment capital.
  • The suppliers will take a percentage of the profits and equity in the company as payment.

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