Outsourcing in the New Millenium | Article

man steping over the globeIn the twilight of 1999, it is undeniably clear that outsourcing is positioned for huge growth in the new millennium. Along with that growth will be some growing pains and dislocated joints but, in the end, their effect will be one of amplifying the inherent value of outsourcing. In 2000, outsourcing will evermore so be the business tool and strategy of choice for building up competitive advantage.

This special issue of OutsourcingJournal is our annual look at the forecasts of renowned industry analysts and outsourcers as to their predictions for outsourcing for the coming year. By bringing their considerable knowledge, experience, and postulations together in one place, our readers can benefit from information on the developing changes in outsourcing.

That being said, we at Outsourcing Center have done our own sifting through the events of 1999 in the world of outsourcing, as well as economic trends, evolving efforts to better outsourcing relationships and, of course, the effects of rapidly changing technology. Having examined the various possibilities for the year 2000, we share with you now our analysis of the new paradigm for outsourcing in 2000.

Ricochet Effect

Outsourcing endured a slow down during the first six months of 1999, due to organizations having to put their resources into remediation of Y2k problems. Once those issues began to come under control, we have seen a big rise in every element of outsourcing over the last quarter, and we believe this trend will go forward into the next millennium. We see a rising tide in outsourcing, across the board, and predict that it will
continue to pick up and go forward at huge growth rates for probably a minimum of two years.

Several phenomena will be driving this movement. On a worldwide basis, it will be a ricochet from pent-up demand and an increasing demand to restructure organizations and move projects forward that have been put on hold during the Y2k phenomenon.

More importantly, Y2k remediation has brought home to executive teams that they have made huge investments and are not getting a significant return for them. That is almost the definition of a non-core process, and it has prepared them with the fundamental mindset to divest themselves of non-core processes. It has caused a re-examination of core vs. non-core processes. Underpinned by Y2k, executives are realizing that they just put a lot of money into processes and infrastructure just to keep going. Many are turning to outsourcing to examine those processes and are consistently finding that they often can procure those processes better, cheaper, and faster by outsourcing.

Broader Opportunities

Because it allows companies to achieve a reduction in cycle time in getting a world-class, highly effective e-commerce site up and running, outsourcing has quickly become the tool of choice in the e-commerce world. Through intelligent piece outsourcing, organizations can run the race to market in two-three months, rather than the one-two years it would take to develop an e-commerce site in-house. Enormous opportunities for growth in the outsourcing industry exist in e-commerce.

Elsewhere, there are some areas that are hotter than others and, clearly, BPO is a very hot area. The non-IT areas, such as logistics, finance and accounting, HR, benefits administration, are the types of processes coming under extremely close scrutiny. We see a great deal of movement in these markets.

An important impact on outsourcing in 2000 is the significant change in the plethora of new suppliers coming to this market. They generally come from two origins. The first type of new entrant is the companies, particularly in e-commerce, which are funded through venture capital money. These are the ASPs, the web developers and web-hosting companies. There is also quite a lot of venture backing in the BPO arena.

The second type of new entrants has its origins in major companies getting into outsourcing as an extension of their existing business lines. Many of these turn their pioneered shared services centers into outsourcing companies through spin offs.

The enormous number of new entrants in the outsourcer arena brings a significant amount of pressure. Although it provides a wide supplier base that underpins the move of outsourcing into non-traditional areas and functions, it also provides significant price competition and quite a lot of confusion in the marketplace. Buyers are now faced with broader choices in terms of which supplier to turn to for outsourcing services.

Agent of Change

We see the Internet as both an enabling and a dislocating technology. Certainly it creates huge potential both for new types of outsourcing and new outsourcing businesses because it gives BPO–or process-oriented outsourcing–a scalability that it did not have before. Scalability builds economies of scale, which deepens the value proposition in outsourcing because it is a leverage that enables a supplier to provide services better, cheaper, and faster.

At the same time, the Internet has dislocated many of the franchises of the existing outsourcing structures in that it is putting tremendous price pressure on all the components of IT outsourcing. We believe it creates a great threat to existing outsourcers because the savings that can be achieved in the world of new competitors often make the contractual break-up costs seem smaller in comparison. Typically, buyers have not been able to break away from existing contracts because of the high cost of termination. But given the pricing structures in the world, the large amount of savings possible with a new outsourcer and new technology makes a termination for convenience much more viable.

Potential Battleground

No discussion of outsourcing in 2000 would be complete without commenting on the application service provider (ASP) phenomenon. We are starting to see a strong adoption of mid-size ($50-$500 Million in revenue) companies availing themselves of the viable, standardized processes provided by ASPs. Particularly around the ERP solutions (SAP, Oracle, PeopleSoft, Baan), ASPs are offering solutions to companies which have not had those available before. In reality a throw-back to the old time-share structure, companies can basically rent an SAP or PeopleSoft seat by the month, as opposed to undergoing the significant cost of both implementation and maintaining that environment. So it is much more cost effective for these mid-tier companies to adopt these world-class infrastructures and processes, and it certainly bodes well for the ASPs.

We expect to see two changes in this phenomenon very soon. Although it has not yet started happening, we predict that in the year 2000 ASPs will begin moving up the value chain and adopt the measure of providing full BPO services around ERP systems.

The other change we predict is a battle that will be played out between the tier-one vendors (IBM, CSC, EDS) and the venture-backed groups. Although the major vendors are seeing the opportunities in the ASP area, they have been fairly slow to move into that area. With its phenomenal growth, everyone is now taking it very seriously. It will be interesting to see whether or not the more flexible and aggressive venture-backed groups or the well-established brand names will win out in that process. Interestingly enough, we have seen companies, such as EDS, adopting very aggressive price-competitive pricing vehicles. We don’t know who will win out, but we anticipate some significant acquisitions of the key emerging venture-backed groups by some of the tier ones.

The Last Word

The huge changes in competition and technology have the impact of putting pressure on old outsourcing deals. We believe it will cause a significant amount of renegotiation or remediation work on long-term contracts. In addition to the pricing competition, old outsourcing deals were built around old technologies–mainframe technology, desktop (as it was known five years ago).

With the velocity of change of technology, the Internet and the way that services are coming on board, we question whether outsourcing can sustain the ten-year model. We believe long-term deals are going to come under increasing scrutiny in 2000 and that, over the next two-three years, contract length will drop.

In technology and in outsourcing, we face a brand new world.

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