Behind the Scenes | Article

lunch signing contractFor any large production, there is a great deal happening beforehand in the development phase, and there is a lot happening behind the scenes. It is the same with outsourcing. A great deal of effort into forward movement goes on behind the scenes of the evolving outsourcing industry before the multi-million, innovative deals make headlines.

Mark Hodges, now vice president of strategy and marketing at Exult (a global HR outsourcer) and formerly a consultant and analyst who ran G2r, talks about what is happening back stage in outsourcing and how those developments will affect the industry in 2000 and beyond.

Expansionary Moves

There is a lot of movement among the primary players these days. “In IT outsourcing, at the top are the big three–IBM, CSC, EDS–followed very close behind by PricewaterhouseCoopers (PwC) and Andersen Consulting,” says Hodges. He mentions changes among the five companies in that “they are each experimenting with what the other constituency does. IBM and CSC are investing in BPO businesses. Andersen and PwC are beginning to compete on the technology side, in terms of e-commerce and applications development,” he says.

An important phenomenon regarding new players in the outsourcing space is consolidation; however, that term is quite different in outsourcing as opposed to other industries. “If you pick any other industry and say the words ‘industry consolidation’ to a financial analyst,” he explains, “that means that the big guys are buying smaller guys and that whatever small guys are left over, they are not growing as fast as the big consolidators. Although there is consolidation in outsourcing, the combined market share for the top ten keeps getting smaller and smaller because the rest of the market continues to grow faster than the big ones can keep up with. Essentially, there are more new players entering the market than the big guys can buy.”

Hodges points out that the enormous ASP market did not exist two years ago, BPO is a booming new industry, network outsourcing did not exist four years ago, and web hosting is a new market. He mentions Intel is now in the market, having just built eight mega server farms. “I can’t envision what it might be like in 2005 at this point, but there will always be new players,” says Hodges.

No More Bake-Offs

Hodges notes a significant change in outsourcing consultancies this year. “They will be forced to demonstrate their methodologies. The market is becoming more sophisticated, and he says that customers want to retain some of the knowledge that consultancies bring to the table instead of just letting it walk out the door with the consultants.

Methodologies also come into play because consultants will need to focus more on pricing. He says that while consultants are now very good at determining pricing for commodities (like a data center, for example) and making those recommendations to clients, many of them struggle with value pricing. Sourcing consultants have a hard time comparing innovative pricing proposals for gainsharing or business benefit role with commodity pricing. “Many companies now want innovative pricing and don’t want a competitive bake off; and many sourcing consultancies don’t have a good answer for that,” he claims.

He points out that sourcing consultancies are also moving into non-IT outsourcing–matters that are not currently in their competencies. Hodges says little data exists on how to negotiate the pricing and performance standards on BPO, logistics, customer care, HR,
manufacturing, product development, or hundreds of other processes. “If existing consultancies don’t develop competencies in these areas,” he says, “new sourcing consultancies will pop up in each one.”


Hodges believes we will see outsourcing relationships changing this year. “There will be more formal partnering than ever before between the different suppliers of outsourcing. They will try to repeat partnering or consortium success they have had with the same players on other deals.” He also believes there will be a lot more exclusivity in partnerships. He says the attitude will now be “if you are not willing to be exclusive, then I’m not going to bother talking to you.” Hodges predicts we will see consortiums–multiple parties exclusively banning together to pursue certain repeatable opportunities.

“If it’s HR outsourcing, for example, you might see Exult partnering exclusively with an HR consultancy, a Big 5 outsourcer, and maybe a data center outsourcing company,” he says. “For the ten contracts that Exult might be going after, those parties can’t partner with anybody else. They have to do it with Exult, and vice versa. I think we will see more of that.”

Who’s the Boss?

Shareholder pressure will be the driver that forces companies to outsource even more non-core functions, he believes. While management teams used to be the decision-makers as to outsourcing, Hodges says that shareholders in 2000 will be telling management teams what to do. Shareholders will say, for instance, “Why are you trying to build your own warehouses? We want you to invest dollars in what you do best. We will not allow you to build your own warehouse because that is not where we want to see investments going.”

Europe, he predicts, will be the scene of a great deal of outsourcing that has to do with consolidation, especially with shared service centers. “This is because of the economic union and a lot of investment going into Europe,” he says. “They are forcing very inefficient European conglomerates not to have a shared service center in all 20 European countries or an IT data center in all 20 countries. In many cases, this has been done in the past because of legal requirements. The French government, for instance, did not allow French employee data to go to other countries. Those laws, because of the EC, are being eliminated. As soon as they are legally allowed to do so, companies will go through a massive restructuring, consolidation and cost reduction effort throughout Europe.”

Post a Comment

Your email address will not be published.

( required )

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>