Richard Raysman, an attorney with the New York firm of Brown Raysman Millstein Felder & Steiner LLP, believes the most significant thing that will happen in 2000 regarding outsourcing is that the activity will pick up considerably. “I think the Y2k issue has slowed down a lot of decisions for the last half of 1999, including outsourcing,” he comments. He predicts an increase in outsourcing after February and March, once people are comfortable that their Y2k situations have been resolved.
He views the potential amount of litigation due to Y2k problems as being different for the outsourcing industry than others. In many outsourcing relationships, the supplier is in a strategic alliance with the customer, rather than in a vendor relationship. He also points out that many things can go wrong without leading to litigation. “Because of the nature of the relationship, it really has to be disaster, I think, for the customer to want to litigate. The customer is so reliant on the outsourcing supplier.” If a substantial loss does occur where there is a strategic alliance, he believes the parties will be able to come to terms on an adjustment in pricing or another remedy, while the customer is still being serviced by the outsourcer.
New Styles of Relationships
Nearly everyone in the industry predicts that relationships in 2000 will be more strategic. Raysman believes that will take shape in the form of companies selecting their suppliers based on a supplier’s capability of giving business back to the buyer. “In those cases,” he explains, “they both have something to sell. Let’s say a computer company sells its outsourcing services to an industrial manufacturer. The manufacturer might be manufacturing something that it wants to sell to the computer company. To that extent, there is a partnership involved because they are giving business to each other. We at Brown Raysman are seeing more and more of that.” He cautions that, under such circumstances, the parties might not be able to negotiate the best pricing because they are both selling.
He describes another relational change for 2000 in the alliances among suppliers. The use of a single point of contact (SPOC) is an idea his firm sees happening more and more. In that instance, a company might have substantial outsourcing agreements with a telecom, another for IT, one for desktop repair, and another for equipment supply. One vendor is selected to be the SPOC and then filters calls to all of the other companies. “So all of the companies are sort of forced to have a relationship among themselves,” Raysman says.
New Growth Areas
Raysman agrees with many in the industry that e-commerce, telecommunications, and business process outsourcing (BPO) are the greatest areas of growth for this year. He adds two other areas to that list.
The first is manufacturing. Manufacturing a product involves several processes that can be outsourced–packaging around that product, for instance, or the logistics of transportation and warehousing of the product. Raysman believes the biggest growth area in outsourcing this year may be the various processes related to manufacturing.
Another area he forecasts for enormous growth in 2000 is the utilities industry. Due to deregulation, the utilities industry now faces a competitive environment. “The electricity companies are all huge companies,” he says, “and I think a lot of them are looking to outsource to become competitive. They just can’t do it themselves in a variety of functions.” An industry where large companies are worried that smaller utilities or start-ups are going to start selling electricity at a lower cost is an industry ripe for outsourcing.
Economic trends usually affect outsourcing. 2000 follows a time of prosperity for the US, and Raysman believes that will be a factor in the increase of outsourcing. Where companies historically outsourced to generate savings, he believes the level of prosperity will cause organizations to consider outsourcing new processes for more strategic reasons. Customer service functions, for example, now might be considered on equal footing with the goal of generating savings.
Having until now been held back by over-regulation, he believes continental Europe has new potential for outsourcing. “I also think there will be a lot of outsourcing in Europe because it is so difficult to terminate people over there. This may be a way for companies to somehow downsize their employees, whereas they might not have been able to do that very economically without being able to outsource,” he says.
While Raysman recognizes the volume of outsourcing might remain the same, he believes this will be a year of smaller deals (“small” meaning less than $300-$400 million dollars). He has noted a shift in companies tending now to outsource to a number of different best-in-class vendors to meet their needs.
He notes a recent pricing phenomenon that he believes is going to continue. Public companies want very aggressive pricing in years one and two because it affects their profitability and, ultimately, their stock price. Often, suppliers give pricing breaks in the first two years, expecting to get that money back in years three, four and five of the contract. The problem occurs when–as is happening more often these days–there is a management change within the buyer’s organization. The new management looks at pricing for years three through five and does not believe it matches the services the buyer is receiving.
“That starts to create some acrimony,” says Raysman. The new management does not necessarily understand what caused that pricing adjustment originally. It tends to cause the new management to try to renegotiate the transaction and, of course, the supplier goes a little ballistic. This issue has to be dealt with.”