It’s no surprise that the U.S. economic downturn in 2008 has impacted the outsourcing industry, but you may be surprised to learn the effects of those impacts.
Companies’ demand for innovation is also impacting the industry, obviously in the kinds of services that buyers expect from their service providers. But you may be surprised to learn how the impact is changing the outsourcing life cycle decision tree.
In this article, we’ll look at both of these trends and how they may affect your company.
Innovation’s impact on outsourcing decisions
“The demand for innovation is bringing a big difference into the outsourcing equation. It’s not the same flow as it has been historically,” says Keith Higgins, vice president of Worldwide Marketing at Aricent, a global innovation, technology, and outsourcing company focused exclusively on the communications industry.
The historic life cycle flow starts with selecting a service provider, moves to the transition phase of handing over the buyer’s work and implementation phase for the provider’s solution, then eventually shifts to the contract renewal phase. Higgins says companies need to start “making provisions a bit sooner” where innovation is an objective and predicts that companies will go through an innovation phase before the implementation phase.
How soon? Higgins says there’s a big advantage and value proposition in services starting “from the bar-napkin session, so to speak.” The value proposition includes a much deeper partnership. “With our clients, I’ve found that there is a much different discussion when I’m talking to the chief idea officer than when I’m talking to the network implementation guy or gal. We’re viewed much differently. It’s a much more strategic discussion, and we can better help them fine-tune things so they can get to market sooner.”
He says what causes a lot of the “bumpiness,” time-to-market delays, and cost pressures where innovation is concerned is that a company comes up with an idea and then tries to get another company to build it. “So the phases are disconnected, and they’re doing things in a siloed way. Then when you try to connect them, the friction between the silos causes delays and cost increases.”
Higgins believes we’ll see a shift away from “think of it ourselves, build it ourselves, figure out how to hand it over to somebody, and then manage that relationship.” The new flow will be: “think of it together, pay somebody to develop it, pay somebody to maintain it, and be a virtual company focused on the core competency of your business and not on the life cycle phases of products and services.”
But change is never simple. Higgins warns, “Anytime you have that kind of a big shift in doing things differently than a traditional model, there will be a lot of challenges.” He believes the challenges will center around interfaces, hand-off points, defining processes, and even how to do an RFP. “There’s a kind of fairly well-defined way to use outsourcing and best-practice ways of implementing the model. The best practices in how to engage outsourcing companies for innovation are less formed.”
Economic impacts on outsourcing decisions
The impacts on outsourcing decisions because of the economic environment range from acceleration to slow-down. It’s also impacting the development of the business case supporting outsourcing decisions and impacting the provider landscape.
Acceleration. Bob Pryor, senior vice president, Sales and Marketing, HP Outsourcing Services, says that a tough economic environment generally bodes well for outsourcing because of pressure on both the top and bottom line. “There’s a lot of focus on trying to take more costs out of an enterprise to drive more profitability, knowing that the economic environment will cause slower growth or potentially a flatter declining revenue line, and also looking for cost predictability.” And that translates into increasing demand for outsourcing.
He observes that “there’s not really a shortage of capital in the market in the sense that there are a lot of very cash-rich businesses. If outsourcing can have a significant impact on their run rate, if it can help them drive a transformation with high return on investment, there’s quite a willingness to spend the capital.”
Neeraj Bhargava, CEO, WNS Global Services, says the economic environment is causing outsourcing to accelerate in industries such as manufacturing, pharmaceutical, and consumer products that traditionally have not been as amenable to outsourcing. “In times like this, with a combination of both inflation and recessionary environment, costs become very important. But more importantly, companies have to make choices of where they focus their resources.”
Deborah Kops, chief marketing officer, WNS Global Services, compares the economy’s impact on outsourcing with people who have a heart attack and then begin to exercise, alter their eating habits, and think about the lifestyle changes they need to make. She says companies that have experienced trouble from economic impacts will think about “how they need to change their ways and use outsourcing as one of the tools to change their operating model. It does not happen when the economy is good. I’m a firm believer that’s what we’re going to see as soon as we start to come out of the nadir of this economic stage.”
She adds that WNS is already seeing this starting to happen with some activity from diversified financial services companies and even some airlines.
Hurry up and wait. However, Kops notes a trend of a lot of companies approaching outsourcing providers with an attitude of “hurry, hurry” and then following up with “no, wait.”
“It’s a remarkable market right now,” states Kops. “I’ve been in the outsourcing business since 1996 and have never seen it quite like this with so many starts and stops.” She attributes the trend to companies trying to “put out their fires” in response to the economy. They have a “strong spirit” for outsourcing because of the globalization of work, knowing outsourcing does work, and knowing there’s no longer a stigma associated with it. But after starting the process of talking with providers, they decide to wait, often commenting “we need to revisit this,” or “we need to get our stakeholders aligned,” or “we need to get an advisor.”
“In their rush to put out fires, companies aren’t “doing their homework and are not getting their ducks in a row,” she says. Of the deals initiated because of the economy, Kops predicts that there will be some good deals but also failures.
Arthur Mazor, senior vice president, Offering Management & Marketing, Fidelity HR Services, has a different perspective. He says the acceleration toward outsourcing varies by industry and the severity of the financial challenges a company has. Fidelity finds that companies are forming a greater certainty as to the kinds of outsourcing projects they now undertake. “There is a very careful focus on making sure that any special initiatives are absolutely business critical. When economic times are better, companies may have less concern about that.” He adds that some companies are “taking a bit of a slow-down on pursuing large HRO deals.”
Slow-down in RPO. Another area experiencing a slow-down in outsourcing is recruitment process outsourcing (RPO). Kim Davis, senior vice president, Adecco RPO, says that, with the exception of health care and energy, most industries are “not unscathed by the turbulent economy. Employment requirements are down.” He reports that some potential clients have frozen their employment requirements and others are reducing staff.
Davis adds that the economic impacts on the RPO industry exacerbated a situation already forcing the RPO industry and providers to change. The economy has brought to the forefront an RPO “revolution” changing providers’ offerings, risk and pricing models, and even changing the definition of RPO.
Emphasis on business case. Pryor at HP notes what is perhaps the most significant change in outsourcing arising from the economic environment. He says there is more pressure than ever on the fundamentals and solidity of the business case–especially when the improvements will start to occur.
“We’re hearing clients saying they want to have a rock-solid business case with a return on investment that’s attractive within a two- to three-year horizon,” says Pryor. “Enterprises are very focused on those first three years of a deal because that’s the highest impact to the business case they’re trying to drive.”
He says this is causing sales cycles to move faster and predicts that it will continue to accelerate in the coming year. The pace is moving faster because of the need to impact the client’s bottom line faster. According to Pryor, the amount of time that senior executives are willing to spend in evaluating and negotiating an outsourcing arrangement is “shorter than ever. They get pretty frustrated with an 18-month plan when there is a big focus on driving impact to the bottom line in a two- or three-year horizon.”
Lessons from the Outsourcing Journal:
- A tough economic environment causes companies to turn to outsourcing as a tool to help them cut costs and change their operating model.
- Often in an economic downturn, some companies rush to outsourcing as a means of “putting out fires” without first getting stakeholders aligned and advisory information in place. While some of these “fire” deals will succeed, many will fail because of not having done the necessary up-front work for success.
- In tough economic times, some companies become even more careful about making sure their outsourcing initiatives are absolutely business critical than they would in a better economic environment.
- In a difficult economic environment, buyers face more pressure than ever on making sure of the fundamentals and having a rock-solid business case. Of prime importance is realizing a return on investment within a two- to three-year horizon and delivering the highest impact to the business during that time frame.
- Where innovation or R&D is the primary focus of an outsourcing relationship, the buyer can enhance the value proposition of the relationship by engaging with the service provider in discussions as early as possible while still in the “idea phase.”