As we enter 2006, outsourcing stands at a new inflection point. Fundamental and seismic changes are altering the structure of our industry. I see three events that are causing this sea change:
- Buyer unrest is causing a change in outsourcing transactions. They will morph from monolithic mega-deals into higher value deals with smaller components.Until recently, large monolith contracts were the norm. This trend started in the early 1990s when the purchasing departments of large corporations began paying attention to the outsourcing phenomenon. They applied traditional purchasing thinking to outsourcing–understandable, since that’s what they knew. They wanted to consolidate their suppliers, giving each a larger amount of the spend. The result: the corporation would get a larger discount and wring cost out of the process because of the economics of economies of scale.
So outsourcing saw corporations giving larger and larger contracts, grouping more and more processes to fewer and fewer suppliers. This led to the recent consolidation among suppliers.
But enough time has passed to assess the results of these deals and the results of procurement-type thinking. At Everest we hear rumblings of a low-grade dissatisfaction with these large outsourcing deals. Buyers say they are hard to manage because many of the suppliers’ workings are opaque to them. They say they don’t understand what’s going on around them or to them.
Outsourcing buyers now want to structure deals differently.
Next year I believe smaller transactions will permeate all aspects of outsourcing. Next year buyers will want to break up their outsourcing contracts into smaller bundles so that the effort will produce not only the traditional cost savings but also higher business value. They will be searching for suppliers who can provide this value, which may be different from the traditional suppliers who were adept at simply wringing out cost.
I predict buyers will start with ITO contracts, but it won’t be long before this trend spills into BPO. For example, today applications development and maintenance (ADM) is rarely bundled with infrastructure management, formerly a common occurrence.
- Offshoring is here to stay.Offshoring is the mother of all outsourcing changes. It has completely changed the way we think about work. Today it’s unthinkable that companies would even consider not taking advantage of the tremendous cost-saving opportunities when using offshore labor.
These numbers are causing both buyers and suppliers to rethink the entire outsourcing process. Offshoring has dramatically expanded what a company can outsource and the kind of savings it can get when it outsources.
- The arrival of aggressive new suppliers.Today there are a host of new names on the supplier list. They are eager and prepared to take advantage of the first two changes. They have offices in India, China, and/or eastern Europe. They are prepared to unbundle services; they put out their shingles as process or industry experts in the outsourcing service they are offering. They keep their ears to the ground to offer what the new kind of buyers want.
What will this brave new world look like?
- The old ITO environment will change.I predict we will start to have smaller contracts for more discrete components of the IT processes. For example, buyers will search out a supplier with a VoIP (voice over Internet protocol) specialty and another to help them integrate their premises switches with the glass floor.
- Everything that can go offshore will move offshore.Both buyers and suppliers will look at outsourcing the components of each process in a new light. For example, desktop and break fix have to stay close to home because customers want their computers fixed now! But there’s no reason why you can’t send server management offshore.
The new, smaller contracts will reflect this type of change.
- The supplier roster will change.The new, fleet-of-foot suppliers will go after this type of business, banking on the fact they can manage them better than the traditional suppliers. They pose a significant challenge to the traditional IT suppliers, who are structured to handle the mega-deals. The traditional players will have to rethink their service offerings, regroup, and restructure to match the needs of the new market.
I believe buyers now want to hire experts. For example, I predict they will farm out different applications to different suppliers based on the depth of their industry knowledge. Specialists will succeed in this new world.
- BPO will flourish.BPO has been steadily growing for years. But the seeds are in place for an explosion in 2006. Now suppliers can focus on a process like human resources (HR), taking the IT and applicable applications, then adding the offshore labor arbitrage to come up with a very enticing BPO offering. Next year I predict suppliers, especially the new upstarts, will be combining services in new ways to expand the boundaries of BPO.
I predict this will happen in HR, in the expense areas like finance and accounting and purchasing, and in specialty areas like claims processing.
- New governance challenges will arise for buyers.The new outsourcing structure will make governance an even greater challenge. Buyers will have to devise more sophisticated ways to manage their outsourcing suppliers. I suggest building an internal corporate expertise in outsourcing.
2006 will be an exciting year for outsourcing. Buckle up!