What a year! Wipro set up shop in the United States. This year's subprime mortgage mess will actually help outsourcing next year. And non-traditional suppliers won some big outsourcing deals. Here's what it all means and a guess at how these events might impact the industry in the next 12 months.
1. The Indian pure-play suppliers solidified their place in the global marketplace.
David Poole, Vice President and Deputy Chief Executive of Global Business Process for Capgemini, says this year they signed a number of large infrastructure deals "that are the bread and butter of the traditional players. We watched as they tried to mitigate the slaughter."
Martin Cook, GSO, Outsourcing, Capgemini, agrees that the Indian suppliers "have changed the face of the market." But he predicts they may face difficulties in 2008. One relates to growth. "As they get bigger, they have to have bigger contracts," he explains. And they will have to change their market position; "once you compete on price, how to you create value?" Cook asks. He says the only way to do that is to grow. "They will have to make some dramatic moves over the course of the coming year," he says. 2009 might even be the year the industry hears a profits warning from an Indian Tier-1, he posits.
2. Software-as-a-Service (SaaS) will continue to gain traction.
Cook says this year's growing acceptance "is the first step in a long march." Capgemini, for example, is working with Google on the enterprise level of Google applications; it's providing wraparound services to handle things like migration, integration, and the authority to use the software. Cook points out Capgemini has also developed a SaaS solution using SAP for one of its key markets, utilities. "We are betting there is an advantage in embracing it first," says Cook.
Poole, the head of NA BPO, says ITO buyers "don't want to pay as much as they have in the past for software services." And they are tired of paying to make improvements in their ERP systems, he adds. Today, "buyers want their applications overnight, even in HRO and FAO," he says.
Poole says next year buyers will grow "increasingly tired" of managing the application infrastructure that supports specific business processes. He predicts BPO suppliers will partner with or purchase SaaS companies to service this emerging requirement.
3. Wipro expands its global footprint in the United States.
First, it bought Infocrossing. This contributes to the continuing trend of four to five mega players and then a lot of successful small niche players in ITO, says Pat Adamiak, Vice President, Portofolio, Marketing, and Alliances, HP. "This signals the aggressiveness of the Indian players," he says.
Ross Tisnovsky, Vice President, ITO Research for the Everest Research Institute, says this acquisition signifies "a departure from the Indian's conservative attitude toward IT assets abroad." He says this apparent willingness to engage in asset-heavy transactions "will open a new chapter in the competitive dynamics in infrastructure outsourcing."
Then, Wipro set up a small software development captive in the United States, creating US jobs. "Five years ago, many American jobs went offshore to India. We will see a reversal of this in the years to come, as some of these jobs will return back to the United States," says Michael Beygelman, Senior Vice President, Adecco North America. In addition, Indian suppliers want to tap into the US's excellent infrastructure. He believes the US real estate and outsourcing employment markets will benefit in 2008 and 2009 as more Indian suppliers set up shop here because they are discovering it might be cheaper to operate in US secondary markets rather than to do everything from India.
4. China becomes not only the home of service providers; it becomes a multi-million-dollar outsourcing market.
Cook says suppliers are inking deals to service Chinese companies. "The Chinese market is too big and too rich to do it all in-house," says Cook.
5. Standardization takes hold.
Adamiak calls this "services productization." He says the major suppliers have been creating standardized building blocks for services to automate processes. He likens this standardization to the auto industry. "The industry will start to see the benefits of standardization in 2008," he says.
Pat Goepel, President of HR Services for Fidelity Investments, agrees. "Lift and shift is dead," he says. "Standardization will be the hallmark of more deals going forward."
6. Consolidation continues in the human resources (HRO) and recruitment process outsourcing (RPO) world.
Three important transactions occurred this spring. In May Beeline purchased Employer Services Corporation. Then in June Kenexa purchased StraightSource (after acquiring BrassRing in November 2006); and FutureStep, the RPO arm of Korn/Ferry, purchased the Newman Group. In August Hewitt Associates purchased RealLife HR. Then Adecco purchased TalentTrack.
"There are too many RPO firms trying to get RPO market share," says Kim Davis, former President of TalentTrack and now an Adecco Senior Vice President . He says smaller firms will increasingly become challenged as the larger firms continue to build infrastructure and regain the competitive advantage away from the smaller pure-play RPO firms. "They have found out how difficult it is to compete on a national or global playing field given their size," he says. Today, most buyers want to work with RPO providers that they can grow in to, with a global reach, not service providers they can grow out of. "Because the world is flat, TalentTrack as a standalone couldn't compete in a global environment," he continues.
In the HRO world, Northgate purchased Arinso International in June and Mouchel Parkman purchased HBS in August.
As for the big players, the Adecco executive says a mixture of three reasons is driving the buying spree: the need for product extension, the desire to enter a new market, or the necessity of acquiring infrastructure that would take too long to build.
7. Tier-2 suppliers may face a challenge next year.
Cook mentions the woes of LogicaCMG, the union of a British and Dutch company. It sacked its president because of a series of disappoint results. Six month later it still can't find an appropriate candidate. "They can't find a celebrity to take over," says Cook. "Tier-2 companies are having a difficult time finding their place and becoming a Tier-1." He suggests some may be good candidates for the Indians suppliers to purchase.
8. The megadeals are disappearing.
"The first three quarters of 2007 show the megadeal segment of the market-deals with $1 billion in total contract value or $200 million in annual contract value-- is in a long-term decline," says Tisnovsky. These deals dropped in both number and size. He says this continuing trend "is reshaping the outsourcing industry."
Jim Way, Vice President of Operations for Managed Services, Siemens says the trend today is to do pieces of a function, not everything. "Third-generation buyers are scared because they didn't get what they were promised in the past. They don't want to hand over all the keys to the kingdom. Today they just want to outsource their pain points," he explains.
9. Non-traditional suppliers win big deals.
The biggie is the US Army's training deal with Raytheon. Cook says Raytheon, a non-traditional outsourcing supplier, captured a $11.2 billion deal by leveraging its market domain expertise. (That, he says, is how traditional suppliers can compete with their Indian counterparts.) Telecommunications services providers also won many large deals this year. Cook asks, "Are they morphing into broader-based competitors in both ITO and BPO?"
10. Supplier switching is happening at a record rate.
Way says experienced buyers today are disgruntled and want to go in a different direction with a new supplier. "Buyers like the concept of outsourcing but haven't been pleased with their current suppliers," says the Siemens executive. "Even though they have a bad taste in their mouths, they don't want to take the function back in-house." He predicts the industry "will see more of that in 2008."
11. Suppliers will find innovative ways to get paid.
Poole predicts next year buyers and suppliers will increasingly align key interests to enable suppliers to share in the financial impact buyers realize from improved processes.
12. 2007 was the best year ever "for private equity firms to goggle up suppliers and release value," observes Cook.
He says outsourcing suppliers are a favorite of private equity firms because "they have significant revenue locked in over time."
The only failure this year was Atos and CSC. "But they got closer than ever before," he says. He thinks someone "will crack the code" by 2009.
The current credit crunch in the private equity market may hamstring outsourcing suppliers next year. Goepel says hard-to-find capital will slow down some of the merger talks "at a time when long-term investment is critical to outsourcing's success." Cook agrees, saying, "I think there will be a lull next year."
13. The subprime fallout will help outsourcing.
The credit crunch may benefit the industry next year because merger and acquisition activity will be lower. "We will see a positive blip in the outsourcing marketplace because outsourcing is a positive alternative to mergers and acquisitions. We'll enjoy growth," says Cook.
14. The US election will bring healthcare into greater focus for HR suppliers.
Goepel says the election and the recent GM/UAW contract negotiations made everyone more aware of the costs of healthcare. That will drive more companies to outsource their benefits and change the way HR companies handle healthcare. He predicts buyers, "who are no longer paternalistic," will turn to their suppliers to help employees figure out their healthcare options. "HR suppliers are on the front lines and have expertise in providing the support that employees need to make important decisions around their healthcare and benefits."
15. On another healthcare front, Way says healthcare outsourcing used to be a strategic decision.
This year healthcare providers were more focused on cost. "They want us to provide better service at half the cost," he says with a laugh. Siemens tries to provide better service that's budget neutral, he adds.
16. Consolidation occurred in the outsourcing advisory industry.
Information Services Group purchased TPI in October. EquaTerra purchased Morgan Chambers. "These changes will affect how deals get done," says Adamiak.
17. Offshoring is still an emotional issue for the C-suite.
Way says some of his prospective buyers are "torn between trying to make a good business decision and protecting their image." Siemens has some customers that have a clause in their contracts that allow them to pull out if they Siemens offshores any services. He expresses surprise, considering the cost and quality the supplier can provide from India.
18. The United States remains the largest outsourcing marketplace.
The Dutch market is "hot," according to Cook. But the big surprise is France is becoming an outsourcing powerhouse. "French multinationals are realizing they can't do business without outsourcing," says Cook. He predicts some big deals will come out of France next year.