What a year! The U.S. economy changed radically as the free markets of the last 30 years imploded seemingly overnight. And industry consolidation became the hallmark of the supplier landscape. Here’s what happened, along with some guesses about how these events might impact the industry in the next 12 to 24 months.
1. The U.S. economy
“Obviously the U.S. economy is the top event for 2008,” says John McKenna, chief services and strategy officer, CompuCom. Kim Davis, CEO of Adecco RPO, says the economy “has changed the outsourcing landscape.”
For better or worse? McKenna says he’s “a glass half-full kind of guy, so I’m not going to say clear and present danger.” Instead, he believes the economy has become “a clear and pleasant enabler” providing positive opportunities for both buyers and suppliers.
For buyers, McKenna provides words of caution: Don’t cut corners. Don’t jump too fast to offshore, outsource, or automate unless you have the process down. Instead, he suggests “defining and mapping the process” before making a move, even if the CEO drops by your office and says, “I need you to cut costs by 20 percent.”
The tough economic environment has resulted in a lot of hospital bankruptcies and closings as well as areas where three or four hospitals are consolidating into one. This creates an opportunity for service providers such as Siemens Medical Solutions. Barb Lines, director of development, says the number of different types of experienced hospital personnel that will be out of work can increase the talent and expertise of Siemens across the country. “They could work from home and provide services in various areas of our business. We can even pass some of the savings from gas prices on to the customer.”
Jim Way, vice president, Siemens, adds that it may create a new opportunity for Siemens. “Hospitals have been reluctant to use offshore staff. As we start having people who work remotely but locally, it may open up a whole new world for us as far as being able to choose where our labor comes from.”
Davis adds “economic forces are driving industry consolidation. There are too many players.” That leads to event No. 2.
2. Merger activity and industry consolidation
In May HP announced a landmark transaction: its intention to acquire EDS for $13.9 billion. In addition, CompuCom acquired Getronics’s North American operations. And Davis says “there were more mergers and acquisitions in the RPO space in the last 12 months than any time prior.”
The big news is HP-EDS. “We look at the HP-EDS deal as a significant industry consolidation event,” says McKenna.
The deal expands HPs IT services capability. The worldwide market for IT services was worth $748 billion last year, according to Gartner. IBM was the market leader with about $54 billion in revenue. EDS was No. 2 with $22 billion in revenue. Accenture was third, and Fujitsu was fourth. HP ranked fifth with about $17 billion in revenue.
Now HP is No. 2 behind IBM.
HP has attempted to expand its services business for years; EDS is not its first attempt to do so. In 2000 HP dropped plans to acquire PricewaterhouseCoopers Consulting, which IBM bought two years later. “My reaction to the HP-EDS transaction: its good news/bad news,” says Eric Simonson, managing principal of the Everest Research Institute.
The bad news is the larger players have to consolidate to retain competitiveness and look for more growth, he explains. “The market is reaching maturity, so all the players have to think about industry consolidation.” Bob Pryor, senior vice president, HP, predicts industry consolidation “will increase next year.”
Pryor says traditionally HP has been strong in distributed environments, network services, and hardware. EDS has a strong infrastructure practice which HP has been building for years. “HP’s infrastructure capacity is decent, but it would have taken years to get to the same level of sophistication and size,” Simonson points out. “The acquisition helps HP get there faster.”
For example, HP doesn’t sell a mainframe product. “It wasn’t a focus for them,” says Simonson. But EDS “lives, breathes, and sleeps mainframes.” He says EDS’s deep understanding of the mainframe business “strengthens HP’s position.” Adds Pryor, EDS provides a “huge expansion of scale and capability.”
In addition, Pryor points out EDS is strong in the financial services sector, which still uses mainframes. It also has well-known public sector, healthcare, and automotive practices. “We aren’t as big a player in those areas,” he notes.
EDS also has a big offshore presence, a plus for HP, Pryor adds. He says about 50,000 of its 140,000 employees do applications work. “The acquisition creates a significant increase in our applications capability,” says Pryor.
Another benefit: HP purchased Opsware, a data automation company. Its biggest customer had been EDS. “It’s a key part of their architecture and a great fit for our technology,” says the HP executive.
Overall, Pryor says the EDS acquisition “gives us the ability to have a much larger integration practice.” On the other hand, EDS has been trying to build its finance and accounting outsourcing specialty. “HP is really good at that,” says Simonson.
The good new is both companies are “reasonably complimentary and well positioned.” Neither are “broken companies;” he says this was not a merger “out of desperation.”
Simonson observes both “have happy customers and real capabilities.” He predicts this will be a good union “because both parties bring something valuable to the table.” In addition, he says HP “does a good job of being a people business,” which is important in the services outsourcing model.
More good news: Simonson says the acquisition “is a good signal of HP’s commitment to the IT space. ” Notes Pryor, “We now have the ability to reach a larger marketplace. The acquisition makes us a significant player.”
Pryor is confident the combined entity will “get out of the gate quickly.” He predicts HP will have “some notable client examples” by the end of 2009.
HP started the integration process in September when it announced plans to eliminate 24,600 positions or 7.5 percent of its combined global workforce during the next three years. John Madden, principal analyst at Ovum, says the announcement “showed how HP’s software investments, R&D, product and solutions development, as well as the EDS deal, have positioned the company for future growth even in a slowing economy.”
What does the merger mean for outsourcing buyers? Simonson sees no significant changes for either company’s current buyers. But the merger may complicate buyer decisions in the short term.
Pryor says the math of consolidation means buyers will have fewer choices. But he says “they are better choices. The quality of the offerings is more important to buyers than the number of suppliers.”
McKenna agrees. He says consolidation gives service providers the opportunity to “provide more agility and flexibility for their buyers.” He views industry consolidation “as a big driver in 2008 for increasing value.”
3. The Beijing Olympics
Greg Baugh, senior director of operations of Managed services, Siemens Medical Solutions, says the fact that “China showed well in the Olympics” will impact buyer offshore location decisions next year. He predicts the positive exposure will move China into the top outsourcing tier. Since the country had been in the second tier before, “a lot of people hadn’t considered Chinese outsourcing suppliers.” Now he predicts “China will give India a run for the money.”
Anirban Dutta, head of Strategic Deals for TIMES, Stayam Computer Services, agrees that the “glamour” of the Olympics has helped the Chinese outsourcing effort. He points out a lot of Olympic sponsors are corporations that have endorsed outsourcing and offshoring.
The Satyam executive says most outsourcing suppliers have a China sourcing strategy. He says “Indian companies are moving into China in the BPO space. The Chinese government is very open to this by providing incentives,” he adds.
4. The U.S. presidential election
Dutta predicts the results of the election will impact offshoring “one way or other.” At this stage, offshoring is no longer “India versus America. Corporations realize business has become global and outsourcing work can happen in multiple countries,” Dutta continues.
Way agrees this election is not about outlawing offshoring. Instead, it will be about how outsourcing and offshoring will work under the new administration. Whoever wins, he predicts suppliers working in the international arena will face more government regulation.
5. Changing BPO deals
Gianni Giacomelli, head of Strategy and Marketing for SAP, says people, process, and technology became “more heavily blueprinted, so buyers could get better results and suppliers could be more profitable.” He predicts this trend will accelerate in 2009.
Dutta says the industry began to see “a lot of innovative deal structures” this year, a trend that will continue next year too. One example: This year Satyam signed a public-private partnership with the subway system in Bangalore.
The Outsourcing Journal asked each sponsor to make one prediction for next year. Here’s what they see in their crystal balls:
Adecco RPO: The Recruitment Process Outsourcing (RPO) market will trend towards recruitment process augmentation versus multi-process, multi-disciplinary, enterprise-wide RPO solutions.
Capgemini: Western firms gain significant ground on Indian heritage firms in the race to build out the best integrated global delivery model.
CompuCom: 2009 will bring the game-changing possibility of industry-specific infrastructure process maps with enabling technologies, which will bring IT organizations into the out-perform category in terms of innovation and agility and lead to infrastructure process reeingineering and “information-as-a-service.”
Fidelity HR Services: We will begin to see a major value shift in HR Outsourcing to increasingly focus on serving the needs of individuals. Providers will need to deliver an individualized experience that enables better access to information, decision making and action on the part of employees, retirees, line managers and HR team members to tackle everything from achieving personal and career goals to workforce challenges.
HP: Carbon disclosure, carbon accounting, carbon remediation, eWaste, and other forms of environmental sustainability that accompany the 2009 enterprise will require specialized expertise and capabilities around environmental sustainability. This is an excellent opportunity for outsourcing providers.
Oracle: Economic difficulties will bring new opportunities for providers that can demonstrate cost reduction opportunities to the board. We will also see a larger emphasis by providers on managing their touch points with customers’ IT infrastructure and deploying in a more standardized, repeatable format.
SAP: 2009 will be a year of back to basics, rediscovering and articulating the benefits of standardization as a foundation for scale, process optimization, and even labor arbitrage.
Satyam Computer Services: From 2009 on, we are going to see some opportunities around being true innovators. Existing global financial challenges, where customers will be more open to work with strategic suppliers in reinventing their business models, is fueling this drive.
Siemens Medical Solutions: In the face of the new economic strategies, government regulations, and information technology advances, such as the electronic medical record, direct patient order entry, and medication management, the physician acute and ambulatory healthcare market will find more opportunity to offset its services with solutions offered by outsourcing suppliers.
Wipro: End to end process visibility, agility, and accountability drive today’s complex value chains, which makes value sourcing a critical requirement for large-scale sustainable business performance improvement initiatives for Fortune 1000 diversified global businesses.
WNS: The “hurry and wait” decision many industries have taken on outsourcing — especially in financial services — will reach a tipping point. These industries will require business process outsourcing to achieve their urgent financial objectives. Many will be forced to act quickly.