Before the Internet, companies overseas were very insular, believing they could run their businesses better than “foreigners.” However, global competition on the Internet is forcing them to change their views. These new pressures are compelling them to look at alternatives. Outsourcing is becoming the favorite vehicle to remain competitive in the new economy.
“Any time change happens and people take a hard look at their business models, they use outsourcing to redesign their business,” says David McGee, managing director with Technical Partners International Inc. (TPI).
TPI, a global outsourcing consultancy based in Houston, Texas, predicted international markets would become a new growth area. The firm opened a Sydney and a London office in January 1999. Eighteen months later, their assignments are growing as fast as the number of new Web sites. Here is their perspective on the trends in international outsourcing.
Australia: Heating Up Down Under
Things are looking up down under, according to McGee, managing director of TPI Asia-Pacific LLC, which is based in Sydney. Australians historically have had a protectionist mindset. The federal government “has been more than willing” to subsidize Australian companies so they didn’t have to worry as much about global competition.
The Internet was the Trojan horse, allowing competitive forces to enter behind the battlements. “Today the government won’t slow the inflow of global competition,” says McGee. Subsidized corporations with annual revenues in the billions are now watching smaller, faster e-businesses steal their market share. “The Internet is forcing top management to say, ‘I have to compete or I will be out of business,'” he says.
They are turning to outsourcing as a competitive business strategy. Outsourcing cuts costs, which is mandatory in a highly competitive environment. But Australian companies are also looking at outsourcing as a new source of investment capital. Corporations can outsource non-core functions and use the freed up cash to remake their businesses. They need this restructuring to shore up their ability to compete.
Outsourcing for Knowledge Transfer
Outsourcing is another way to play catch up quickly in the talent search for managers seasoned in technology. Australia suffers from a shortage of technical skills in the local employment pool. McGee reports clients in every major transaction he is working on are requiring the supplier to import overseas talent as a clause in their contract. For example, a buyer will demand IBM send in US talent to deliver the contracted services and help transfer knowledge to their Australian co-workers.
Australia’s traditionally strong labor unions, which would have vehemently opposed foreign labor, are caving in on the issue. Their power has hurt Australian business’ ability to compete and change in the past. Once again, the new global economy is creating a new reality.
McGee says the way companies outsource is also changing. Four years ago Australia witnessed four large outsourcing transactions: EDS with the government of South Australia, EDS and CBA, IBM with Telstra, and IBM with Lend Lease Corp. The analyst says these transactions are now reaching maturity at a time of tremendous change.
“These contracts were based on a late 1980’s and early 1990’s contracting model which did not allow a lot of flexibility,” says McGee. But today’s world is changing rapidly. Flexibility is a key to survival. Buyers are now reevaluating their outsourcing relationships, trying to upgrade them so they reflect the flexibility they need in this evolving e-world.
In addition, these big companies are balking at single providers. Today they want a team of suppliers. McGee predicts these big companies may ask one supplier to partner with the others.
The Push for Managed Network Services
The biggest trend in Australia is the introduction of managed network services in the telecommunications arena. McGee reports half of the deals he is working on revolve around outsourcing managed network services.
In the past companies would call the local telecom utility and order products that were available. Customization was unheard of. And there were no service levels on the products they purchased. If a construction worker accidentally cut the line with a back hoe, killing the dial tone, the utility’s attitude was “Oh well. We’ll fix it soon enough,” recalls McGee. That attitude won’t work when things move at Web speed. Contracts now routinely require 99 percent availability.
Today, when companies outsource their telecom function, they want it their way. The clients determine what products and services they need the provider to install and maintain. Clients are looking for providers with specific technology, McGee says. And they want a network configured to help all their branches compete. “Clients are buying network availability, bandwidth, and service, not products,” says McGee.
The impetus to change is the Internet, which is pushing computing intelligence into the telecom network. The computing technology that has historically resided on the customers’ premises is now moving into the network. “Today you have a lot of intelligence in your telecom network,” McGee explains.
McGee predicts outsourcing suppliers will be teaming with local telecom providers to provide these managed network services, like the recent GM-AT&T alliance. “This is the new telecommunications outsourcing model,” he says.
Europe: Planting the Seeds for Megadeals
John Buscher, managing director of TPI Europe, believes the Continent is ripe for megadeals in the $1 billion category. Within the next 18 months the largest European corporations will ink outsourcing contracts to help them compete in the global marketplace.
When a major corporation signs a big contract, “that will be the first domino,” says Buscher. Then all the other companies in that industry sector will have to take a serious look at outsourcing because they realize it gives the first company a competitive edge. “The biggest companies have no choice. They must acquire these synergies. Outsourcing is the right answer for them,” explains the managing director.
Historically, Europeans were slow to embrace outsourcing. Like Australia, the protectionist outlook viewed outsourcers as interlopers who certainly couldn’t do the job as well as the nationals could. “They wanted to protect the crown jewels,” says Buscher.
The changing world has now changed that perception. Before the advent of the Internet, Europeans were slowly accepting outsourcing as a viable tool to cut costs, a plus in any economy. Today, companies are subscribing to the whole outsourcing concept. They view it as a way to standardize their divisions across the globe.
They have discovered outsourcing is also the fastest way to acquire technology skills. When corporations tried to recruit IT talent in the local marketplace, they discovered the people they wanted to hire preferred to work for an IT firm. Buscher says companies trying to do e-commerce in-house found it virtually impossible to hire anyone since this speciality is a scare commodity. Outsourcing has become the only way to touch this talent.
ASP Acceptance is Slow
Buscher notes outsourcing acceptance has stopped at the application level. European companies are willing to outsource their infrastructure but refuse to hand over the applications to a provider. “They don’t want to do the whole enchilada,” says Buscher. The norm is to run the programs in a data center somewhere in Europe but have company programmers customize and maintain the software. ASP growth is slow so far.
While the European Union produces a GNP equal to the U.S., it remains a fractured market. Buscher says what works for the UK is typically not right for France. Countries are adopting outsourcing at their own pace.
The UK is ahead of everyone else in total acceptance. Behind the UK are the Benelux countries and Italy. Germany and Portugal are moving slower. The French are still wary.
Lessons from the Outsourcing Primer:
- Change is eroding the protectionist attitude and forcing companies to consider outsourcing.
- Companies that outsource are considered to have a competitive edge.
- The biggest trend in Australia is the migration to managed network services.
- The ASP concept is slow to grow in Europe. Companies in this region will outsource the hosting but want to retain the applications in-house.