Insider Views on Trends in Global Sourcing | Article

people holding globeWhen it comes to outsourcing, there’s one thing our expert insiders agree on: the industry is at a transition point, and global sourcing is the stimulant of the transition. As Mike O’Hara, Senior Vice President and Senior Managing Director of IT Services at ACS, puts it, “Buyers now have the expectation–and often a requirement–that suppliers have the capability to shift work, by function, to multiple offshore locations on any given deal. It’s almost plug-and-play in a best-shore strategy.”

The shifting of work may be full time or may be just during off-shift hours, depending on the client, the deal structure, and the workload. “We’re really evolving to a virtual sourcing model,” states O’Hara. “We can break up discrete work units and shift those to any of our locations around the globe as needed.”

Mike Jones, president and CEO of (i)Structure (currently pending acquisition by InfoCrossing), says the requests are not just coming from enterprises. Even smaller companies want suppliers to do global network management and run servers in other parts of the world. “It’s hard not to be global these days,” comments Jones.

Global Standardization

Joe Hogan, Vice President of Managed Services at HP, says HP is also seeing a clear trend that clients are comfortable with a global delivery structure and are not so worried about where the work is actually getting done. And it’s not just about the price point. It’s about wanting standardization around the globe.

As Hogan explains, clients say: “We need a single process. We need to be able to close the books in 45 countries every month. We need a single (or very few) instances of SAP. We want our processes and standards to be the same when moving work from one part of the world to another.” And they want to outsource to suppliers that are capable of making sure all this happens.

Client conversations at Acxiom about global sourcing are centered on availability of functions. Marty Sunde, Client Services Organization Leader at Acxiom, says, “This is definitely a major difference from discussions four years ago, and it’s top of mind. Clients are saying: ‘Since we’re comfortable with what you’ve done on our behalf in the United States, we want you to offer the same thing for our European business.”

This is global integration versus global presence. Enterprises want global delivery models because of the synergy. Paul Jameson, Vice President of Marketing and Strategy at Getronics, warns: “Many suppliers have only a global presence. Only with global integration, where there are global consistencies in methodologies and processes in each region of operation, and there is global integrated technology, will the client see the benefit it expects.” Can the supplier, for example, dynamically move overloaded help desk services in London to Houston or New York and not skip a beat? Only if they are running the same systems, have the same processes, and share the same database.

Getronics, therefore, has proactively embraced the IT Infrastructure Library (ITIL) standards for service support and service delivery. Jameson predicts that having a true global service standard with integrated global technology will be the absolute requirement in three or four years. He also believes buyers that think in terms of global presence, rather than global integration, will incur a lot of undue costs.

Taking Chances

Jones at (i)Structure points out another phenomenon demonstrating buyers’ comfort level with global sourcing: custom offshore deals. Historically, the Indian companies specialized in discrete processes. Many buyers had a help desk function, for example, so the Indian companies could invest in help desk services for a lot of different companies. (i)Structure notes companies are now looking at business functions that are crucial to their operations and asking an offshore provider with low-cost people: “Can you figure out how to do this for me?”

“We’re now starting to see purpose-built organizations being set up in India,” Jones continues. “People are taking more risks and more chances on turning over work to Indian firms that they haven’t done before. That’s different from going to somebody who is already doing it for ten other customers.”

Buyers’ comfort factor with using a global sourcing model has increased significantly. Jimmy Harris, Managing Director, Infrastructure Outsourcing at Accenture, says he sees continued movement toward global sourcing in infrastructure management. “Virtually every transaction we’re doing includes some sort of global sourcing component, whether it’s China, the Philippines, or India,” says Harris. “Two years ago, we seldom saw that in the infrastructure space.”

The Provider Landscape

Be on the alert for some movements in 2006 regarding how the landscape of service providers shakes out around the globe.

Suppliers capable of true global sourcing delivery must have a global infrastructure and business continuity to support that. It’s key to the clients’ comfort level with a global delivery model. Suppliers that already have scale globally will be in a much better position; others will be caught short. Some already have to subcontract their disaster recovery/business continuity capability. Some of the Indian suppliers may also need to change their economic models in order to have the capital to invest in the necessary scale and business continuity.

Pressure is building in the marketplace, as all major providers have offshore models. Now they must differentiate more strongly around their intellectual property and expertise. According to Hogan, some Indian firms, for example, are doing virtual consulting on what the retail store of the future will look like.

Hogan says, “There is a trend evolving that I don’t think we’ll fully see for a couple of years. I think, instead of the Big 5 or 6 outsourcers, there might be a Big 10. We’ll see the offshore firms gaining more credibility.” That’s a significant factor coming into the marketplace.

Not shy in sharing advice on selecting a global service provider, Jameson at Getronics says there are three growth scenarios buyers need to discuss with potential providers:

  1. Are you going to be able to help us as we grow internationally, or do you have strictly a US presence?
  2. Are you going to come along as we grow?
  3. Are you already there where we’re headed, and can you lead us?

Where and Why

The experts we interviewed also believe there will be significant changes in 2006 where work is outsourced. Most providers already have significant long-term investments in geographies outside of India. Besides wanting to position themselves for the capability of providing services seamlessly across many different locations, there are several drivers for the country changes.

Turnover. The high turnover rates in India, where the talent pool is willing to jump ship for slightly higher salaries, is causing an accelerated wage rate scale. Attractive replacements for India appear to be China, Eastern Europe, Kuala Lumpur, and Manila.

Political unrest in some geographies. As buyers now view global delivery as a long-term solution, they look at it holistically, including business recovery from hurricanes, earthquakes, or floods.

Language capabilities. Latin America has the talent pool for Portuguese and Spanish needs. Spanish language capabilities are also present in Mexico City, Argentina, or Chile. Accenture is providing services to Japan from China, which has a talent pool with Japanese language capabilities.

China is also the scene for increased outsourcing in services to multinational corporations now moving their operations into China.

The domestic scene. Growth in domestic outsourcing in nations other than the United States and the UK is primarily still in a pioneering phase and not yet large-scale. Most of the deals are in the financial institutions sector and are located in China, Japan, Thailand, Brazil, and Russia.

Offshore data centers. Hogan of HP predicts that 2006 might be the start of when people give serious consideration to taking their physical data centers offshore. “We’ve taken process work offshore and taken applications work and things like desktops and help desk offshore, but we haven’t yet moved the physical data centers offshore yet. As power supplies become more stable in countries outside the United States, someone will be asking about this. It’s the only piece left.”

Conclusion

With the dramatically changing realities of global delivery models, Phil Smith, Vice President of Portfolio Management for Global Outsourcing and Infrastructure Services at Unisys, advises buyer organizations they need a global sourcing strategy. “People need to really think about strategy–where they are headed, and why are they offshoring, what makes the most sense, how can risks be lessened, and is the outsourcing being done in the most optimal manner. And then don’t put that strategy on the shelf. Go back periodically and look at it, because things will change.”

Trends definitely indicate it won’t be just economic pressures that force people to look offshore or nearshore in 2006. “Companies clearly want global capability to help them drive their business growth,” states Chuck Pol, BT’s Americas President. “As in outsourcing in general, there is a growing recognition that value goes beyond the tactical driver of reduced costs. It has shifted to strategic business value outcomes.”

And the “flat earth” point of view is quickly becoming more prevalent.

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