Our experts predict several areas of the industry will experience significant growth over the next five years. Reverse outsourcing, verticalization, emerging markets, business analytics, healthcare, transportation, and ERP are some of the areas that will enjoy increased attention.
Andrew Pery, Chief Marketing Officer, Kofax, says reverse outsourcing will pick up steam. This trend has two facets. First, he says the economic downturn and the weakening U.S. dollar have inspired some companies to move their outsourced work back to the domestic arena. "Today there is a preference to relocate customer-centric functions back to the United States," he says. This trend will "accelerate" over the next five years.
Because the economics now work, Pery predicts American suppliers "will invest more aggressively in offering capabilities domestically." He says the foreign exchange rate combined with the availability of large levels of highly-skilled American labor bring U.S. labor rates "more in line with offshore rates." For example, suppliers can set up shop in rural areas where labor costs are lower.
Pery also points out the federal government may provide incentives to keep work at home. That possibility has inspired outsourcing firms outside the United States to open facilities there. "We envision the stimulus package will provide incentives for companies to utilize outsourcing suppliers that have facilities in the United States, including offshore firms that have set up U.S. offices to take advantage of the anticipated incentives," he says. Infosys's acquisition of Atlanta, Georgia-based BPO provider McCamish in November is one example.
The second major industry trend is verticalization, made possible by the strength of the second-tier suppliers. Pery says buyers of the future want specific, vertically oriented skills and domain knowledge. For example, Cerner and Capgemini are two tier-two specialty suppliers in the healthcare space. "They will grow their business at a rate higher than some of the more established firms," Pery predicts.
The Kofax executive also points out the major firms are increasing their investment in vertical solutions as well. He sees the one-size-fits-all outsourcing model will lose popularity over the next five years.
In the past, Pery points out buyers "were somewhat reluctant to outsource their mission-critical applications. But that dynamic is changing dramatically because of the economic volatility in the downturn." Now companies need to shed costs, so economic pressures are driving them "to outsource their mission-critical vertical applications to firms that have demonstrated experience in that area."
In the financial services market. Paul Diegelman, Practice Manager, Finance and Accounting Optimization for BancTec, predicts commercial banks will be exiting the check and payment processing outsourcing business and strong, non-bank technology and processing providers will take up the slack and dominate the market. "The economics of check and payment processing requires high capital expenditures and onshore head count yet generates lower returns. That's why commercial banks no longer favor it," he says. He predicts the continued outsourcing of this process, which large corporations rely on for their working capital, will accelerate.
Don Schulman, General Manager, Finance and Administration for IBM, believes the industry, which is already consolidating, "will continue to do so in an accelerated manner." He predicts buyers "will start to circle around a few of the big players who have the funding to make the necessary investments and drive to best practice standards."
Ravi Kapoor, Practice Manager, Supply Chain Management for Wipro, says another area of growth for suppliers is helping buyers "embark on green initiatives throughout the enterprise." Specifically, suppliers can advise buyers on how to make their data centers more cost-effective by going green.
Karthik H., Research Director, Everest Research Institute, says outsourcing companies will need a delivery network of multiple locations to compete in the marketplace of the future. That means suppliers "that have a global presence and access to skills in different markets will have a greater chance to succeed," he says.
Karthik says it's common for Fortune 500 companies to have as many as 20 centers across the world. "They want to access the unique skills and benefits of each location," he explains.
While he believes India will continue to retain its dominance as a global sourcing location, he feels companies "will consciously think about diversifying into other multiple locations." Access to skills is the most important driver, in his experience. But diversifying risk is also important; the terror attacks in Mumbai last year "got people to think about diversifying some types of work." A third driver is time zones. Suppliers have to do some types of work, like IT infrastructure maintenance, in real time.
As for locations, Karthik predicts the Philippines will record "similar or faster growth than India" because of its large talent pool and cultural affinity with the United States. Many of the other countries in Asia "will record moderate growth," he notes. He says China is growing -- focusing on its domestic market and Japan.
"Africa will be of increasing interest" in the next five years, the Everest executive predicts. The reason: the new Seacom cable has slashed telecom costs up to 80 percent. For the first time, African locations will offer a "robust infrastructure."
In Eastern Europe, Karthik believes growth will shift from tier-one to tier-two cities. Similarly, he predicts the smaller locations in Latin America "will become increasingly significant."
Everyone interviewed agreed emerging markets will be an area of growth - whether it's an emerging market for new outsourcing buyers, new process domains, new capabilities such as analytics, or new geographies for service-delivery locations. IBM's Schulman says the supplier's "emerging markets business is explosive." He says IBM has made "significant investments" in China, Eastern Europe, India, Latin America, and other parts of Asia.
He says the growth in those emerging markets started with mature corporations trying to enter into commerce in those locales. But today and five years out, he says the real growth will reside in home-grown companies in those markets. "The financial crisis has caused a lot of fast-growing emerging markets to look inward and create a domestic capability instead of an export market," the IBM executive explains.
These companies "recognize they need more sophisticated capabilities, so they are coming to us and asking for help." Five years ago, he says offshoring "was all about labor arbitrage. But now there's clearly no labor arbitrage in emerging markets. Today the industry is about more enterprise business outcomes, process optimization, and cloud computing. We are able to provide value-added services to these local companies that support their strategic evolution," Schulman continues.
Analytics and business intelligence
Rahul Singh, Head, BFS & INS BPO for Tata Consultancy Services, predicts within two years "all customers will seek to outsource research and analytics, thus leveraging business insights from their service providers to further support their business strategies."
Schulman says outsourcing buyers are looking for suppliers to provide "analysis and insight that would transform their businesses." He says buyers want analytics embedded into their outsourced process "to improve productivity and drive business outcomes." Suppliers have made significant investments in these capabilities and can provide the insight needed to drive better business decisions, which buyers "would never have achieved on their own."
For example, IBM's analytics services helped one client quickly identify that many of its customers were beginning to slow pay and rapidly forecast the impact on working capital. "This was something they previously could not have seen on their own," Schulman explains.
TCS assisted a U.S. retailer in eliminating more than $10 million in inventory turnover costs by applying analytics to its supply chain services.
Mohammed Haque, Vice President & Head of Enterprise Solutions Service practice at Genpact, predicts business intelligence, which runs on top of the ERP platform, "will grow big in the next five years." He says that's where "most of our customers are investing heavily right now."
Haque says outsourcing buyers want to have a "single master view of data. This knowledge improves their decision-making or increases revenue." In the past, customers have grown through acquisitions, leaving different divisions on different platforms. The result: "They don't have one single view of the truth," he says. In the future, buyers want a unified view of their suppliers and their customers. So data management will be different.
He gives a procurement example. Many companies have no idea what they spend with their top three suppliers. "Without a spend analysis, they are not able to negotiate bigger discounts. They are in a much better position if we can deliver this knowledge," he explains.
To help the American economy recover, this year the U.S. Congress passed the American Recovery and Reinvestment Act (ARRA), which included legislation that impacts the healthcare industry. And then there's the current Congressional action on healthcare reform. "You don't have to go much further than the front page of the paper to understand the government is going to be taking a significantly greater role in healthcare," says Will Saunders, COO, Government Healthcare Solutions Group for ACS.
These changes in the industry will increase outsourcing because healthcare providers and payers cannot implement these changes on their own and certainly not at the pace they want. There will be "a progressive shift toward healthcare outsourcing over the next five years," says Dr. Harry Greenspun, Chief Medical Officer, Dell Perot Systems.
David Cummins, Vice President of Business Development for ACS's Transportation Solutions Group, points out the "widening gap between transportation demand resources and the 'supply' of infrastructure has reached crisis proportions across the globe." The sagging economies, escalating fuel prices, and the public's resistance to raising fuel taxes are exacerbating the situation.
At the same time, environmental concerns are "front and center." Over the next five years, he predicts the public sector will continue to turn to outsourcing to minimize capital expenditures for increasing infrastructure capacity like new roads, transit systems, and ports. "Governments will increasingly look to the private sector to increase the efficiency of their existing capacity through technology and low labor costs," he says. He estimates the global outsourced transportation market will grow by five to seven percent annually over the next five years.
Cummins predicts a key change in transportation outsourcing will occur over the next five years. He says buyers are "looking for outsourcing partners to share in the risk and reward of taking over significant public projects." An example of this type of arrangement is already underway in Lima, Peru, where ACS is financing the up-front investment for a smart-card-based transit solution; in return, the supplier will share in revenue from the operations.
Haque says the current economic environment "is a major catalyst for outsourcing ERP." Another driver is "sub-optimized performance" of past ERP installations.
The third driver is the wave of mergers the economic recession created. For example, one company's ERP may have SAP but the other may have Oracle. Once merged, these companies have to select one platform and then implement it company-wide.
Ritesh Idnani, Vice President and Head of Global Sales and Marketing for Infosys BPO, predicts new specialty BPO service providers will "emerge and grow faster than the big providers." When the next wave of consolidation occurs, he suggests some of the big providers will look at specialty firms "to expand their footprint and preserve their market leadership." Especially valuable will be vertically oriented BPO providers with specific industry knowledge and/or IP. "That will enable the big providers to offer those services, leverage the infusion of skills, and move down market to serve the small-to-medium market, which is looking to move into the BPO market," he predicts.
Lessons from the Outsourcing Journal:
- Reverse outsourcing will grow as the foreign exchange rate and the high unemployment rate in the United States make outsourcing to suppliers on American soil financially attractive.
- The economy is causing companies to consider outsourcing some of their core competencies. But they want suppliers that have proven expertise in their domain. Verticalization will become more important in outsourcing.
- Global delivery services, or offshoring, will increase over the next five years because companies will want their outsourcers to be able to move work to multiple locations to access skills and diversify risk.
- Changes in U.S. law will stimulate growth in healthcare outsourcing. Payors and providers are realizing they lack the personnel, expertise, or facilities to manage applications that have to be on continuously and that have to comply with newly strengthened privacy and security regulations.
- Analytics services is an area of growth for outsourcing because buyers want their suppliers to provide insights from their data so they can make better decisions and improve their bottom lines.
- There will be market growth opportunities in the transportation outsourcing area because governments want to invest in technologies that make the transportation system work better. Over the next five years they will increasingly look to suppliers that are willing to enter into risk-sharing arrangements to help finance transportation initiatives.