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New Impacts on Outsourcing

Discover the dynamic landscape of outsourcing, as we delve into key business trends, impacts, and insights that shaped the industry during this transformative year.

New impacts on outsourcing include service-oriented architecture (SOA), service provider “DNA,” green IT, the changing role of physicians, and what the future holds because of the convergence of technology and business process. This article looks at what you need to know about each of these impacts.

Service-Oriented Architecture

“I’m really excited about SOA,” says Gianni Giacomelli, head of BPO Strategy and Marketing, SAP. “Conceptually, it’s a revolution in outsourcing that will take it to the next level.”

Software implementations today are constrained by yesterday’s way of writing code. As Giacomelli explains, software developers wrote hundreds of thousands of lines of code that, together, handle a business process (such as finance and accounting). But the code is not clearly segmented into functions or subprocesses (such as accounts payable, accounts receivable, collections, general ledger, and fixed assets). It’s often difficult to take out the lines of code for subprocesses and give them to another company. And, at times, companies have to implement an entire system even if they only want to use one segment of the code.

In contrast, SOA makes the code accessible in pieces, so to speak, that are very easy to map to business subprocesses. So if a company only wants to implement a system for collections or a system for the general ledger, for example, SOA enables that option.

“By being able to do that, you enable one simple thing: specialization,” explains Giacomelli. He compares it to automobile manufacturers that use subcontractors to build almost of the components that make up a car. “Those components became a natural breeding ground for organizations that are specialized in doing specific things such as making brakes or transmissions. Without specialization, we wouldn’t be able to have cars that cost what they do today. Cars were expensive and extremely rudimentary decades ago because there was no specialization in the components in the car.”

SOA has the potential to generate that specialization in the outsourcing industry because it enables providers to take much more granular pieces of a process and concentrate on them. “By concentrating only on one piece or on a few pieces, service providers can actually choose the ones in which they are really, really good, the ones in which they really can create significant economies of scale for 100 or 200 customers,” says the SAP exec.

That’s a value proposition that Giacomelli points out is still sometimes lacking in BPO today. “Many providers are not bringing to the fore significantly different economies of scale that the client can’t replicate because many providers have at best only a handful of clients running on the same platform.”

What are the implications for buyers of outsourcing services? The risk and difficulty of outsourcing subprocesses will be much lower. “The connection points between the piece the buyer moved out and gave to the provider and the rest of the retained subprocesses are going to be very clear because they are mapped into the software. It’s almost like taking a Lego piece out of a structure; it still recombines fairly well with the rest because the connection points are very regular. SOA is also great for making new and improved pieces fit with the rest of the structure; there’s less pain with enhancement, upgrades, and ultimately innovation.”

The ideal scenario is one where both the buyer and provider have SOA so that they can communicate in the best way and so there is a minimum amount of “stranded assets” on the client side. “But the reality is most clients don’t have SOA in their landscape today for most of the processes. It’s changing, and there’s a wave of adoption today; however, broader adoption will follow the rhythm of upgrades, so it will take 10 years,” says Giacomelli. “This said, the fact that the provider is already able to use SOA on its end to build very focused ‘droplets’ of subfunctions is game-changing.”

The big advantage of SOA in outsourcing is a win-win for buyers and providers. Giacomelli points out, “With SOA, the BPO provider needs to implement and run only a specific piece of the entire application landscape (such as the collections piece of the accounts receivable process). Therefore, the implementation will be much less complex, less lengthy (and costly) than traditional implementations.”

Provider DNA

“I think that the biggest thing in the outsourcing landscape over the next year or two is going to be the expectation of the customers of a much different DNA in the suppliers that they work with in the outsourcing space.” That’s the belief of Keith Higgins, vice president of Worldwide Marketing, at Aricent, a global innovation, technology, and outsourcing company focused exclusively on the communications industry.

In an age where user experience and consumer demands dictate product development, companies are under pressure to innovate and get to market a lot faster than ever before.

“We’re moving from cost arbitrage to skills arbitrage,” claims Higgins. This is different from the DNA required for just being the recipient of a client’s to-do list and doing it globally at lower cost. Outsourcing providers are now moving up the value chain and product life cycle all the way to the whiteboard.”

As clients ask for innovation, industry domain expertise will be “paramount to selecting the right outsourcing partner.” It will enable more streamlined expertise for the buyer. Higgins believes the trillion-dollar outsourcing market will soon fragment into players focused on domain expertise.

“It will be the death of the mile-wide inch-deep outsourcing deals,” he says. “You can’t be a jack of all trades in the outsourcing space.” He predicts that domain expertise will be a self-fulfilling prophecy; the more customers a provider has in one domain, the better the provider “gets it,” and the more customers the provider will gain.

Neeraj Bhargava, CEO of WNS Global Services, agrees. “Successful providers are going to have greater industry specialization.” He says the DNA of offshore providers will also change. “The successful offshore companies will add more value by combining their talent with technologies.” According to Bhargava, offshore providers like WNS have the momentum of growth at 40 percent per year for the past five years. Now they’re adding higher value-added areas such as research and analytics to their DNA. “Areas such as financial research, marketing analysis, and procurement analysis are growing rapidly in the offshore market,” says Bhargava.

Debra Kops, chief marketing officer, WNS Global Services, also lists the changing provider DNA as a new impact on outsourcing in the coming year. “What’s driving the increased focus on vertical domain expertise is the need for the provider to understand the buyer’s industry challenges and changes in business volumes. An example is knowing the context of billing in the utilities industry along with conversion rates and need for accuracy of meter reading.”

Changing role of physicians

One of the big business trends is the changing role of physicians.

Look for a new spin on clinical help desks next year. New opportunities for outsourcing are developing in the physician community, according to Greg Baugh, senior director of operations, Siemens. Business processes in hospitals are changing, and physicians’ roles are changing, requiring them to do more things in hospitals. For instance, in an effort to reduce medical errors, hospitals are implementing systems that require physicians to take accountability and place their orders themselves instead of having other clinicians do it for them.

“Outsourcers will need to change the way they provide help desk services and on-site services to physicians. We need to help the physicians do what’s now being required of them. Physicians can’t delay their work while they’re held up with IT issues. They need support right away and expect answers immediately.”

Physicians are also getting more involved with the electronic medical records (EMR). As companies sell them ambulatory products to handle the EMR, it will create new opportunities for outsourcing services in support of those products.

Green IT

“Companies are really taking up the charge of responsibility to the environment and to society at large,” says Arthur Mazor, senior vice president, Offering Management & Marketing, Fidelity HR Services. Fidelity is finding that most companies seeking to create outsourcing engagements are now including interest in and requirements around environmental sustainability contributions in their evaluation criteria for service providers.

“We’re finding that this is a significant impact on the way that outsourcing providers must think about and execute their business strategies, solutions, infrastructure footprint, and usage of resources that are environmentally friendly.”

According to Mazor, many buyers’ RFIs, RFPs, and questions from analysts and sourcing advisors guiding clients are now requiring providers to demonstrate their positions and environmental contributions. The environmental issue is starting to manifest itself in companies requiring electronic distribution and collection of RFPs.

Mazor says the “big question” is to what degree companies will weight the RFP questions related to environmental sustainability compared to the rest of the provider evaluation. “I think that’s something that companies are wresting with,” he says.

Bob Pryor, senior vice president, Sales and Marketing, HP Outsourcing Services, agrees that the influence of environmentalism in terms of “green” IT is one of the significant business trends shaping the industry today. He ties it together with pressures on data centers for reducing costs of energy and cooling. “These two issues are tightly connected now.”

“We’re seeing very significant trends in this past year about what customers are asking for and the issues they are facing regarding their data centers not being able to handle the higher demands for power and cooling, especially in higher density environments,” says Pryor. Customers are asking about solutions for energy management, conservation, preservation, and alternative energy sources as well as seeking understanding on whether they should build solutions with their own capital, outsource, or do a combination of both.

Convergence of technology and business process

“Although it’s happening in pockets, the trend around the convergence of technology and business process hasn’t quite taken hold yet. But it’s ultimately the new area in outsourcing,” predicts Pryor.

In this emerging model, customers move away from doing everything in an isolated pocket (for example, buy an application from one company, outsource computing capacity from another, and outsource accounting to another company). In the model Pryor favors, customers demand and expect that one company “could provide them all of their business process services with all of the people, expertise, and enabling technology and all bundled back to them at a price however they want it (per customer, per volume, per certain service units, the way they bill their customers, etc.).”

“Combining all of these pieces is an early step in offering on-demand services over the Internet,” says Pryor. While cloud computing (including the SaaS model as one component) is “a profound trend in the marketplace today,” he believes it will take a while before suppliers can deliver everything as a service from an outsourcing standpoint.

“I think you’ll see aspects or components of it in outsourcing within the next three to five years,” predicts Pryor. The question is, how prominent will that be? The answer depends on how advanced the enabling network and computing environments become.” Building the model will shift the risk to providers, along with the significant capital investment.

“It won’t be a small undertaking for providers,” he adds. “So we’ll see it first in niche kinds of services and with early adopters. But as the demand grows, you’ll see the investment and the growth curve that says it’s truly a big trend in the industry.”

In conclusion, business trends are significantly influencing the outsourcing landscape. Understanding these impacts helps shape future strategies for a more resilient and successful outsourcing industry.

Lessons from the Outsourcing Journal:

  • Service-oriented architecture (SOA) will enable outsourcing service providers to specialize in certain processes and thus create more significant economies of scale for the buyers’ benefit; this will create a value proposition that is often still lacking in BPO to date.
  • SOA will reduce the complexity, time, and costs involved in traditional software implementations.
  • The outsourcing market is beginning to fragment into providers focused on domain expertise, enabling them to better meet buyer’s needs around industry challenges and changes in business volumes.
  • The influence of environmentalism in terms of “green” IT is now tightly connected with pressures to reduce energy and cooling costs in data centers. Many companies are now starting to include requirements around environmental sustainability contributions in their evaluation criteria for service providers.
  • Physicians’ roles in hospitals are changing as is their use of IT. Accordingly, service providers need to change the way they provide help desk and on-site services to physicians.
  • Outsourcing will begin moving away from doing work in isolated pockets (buying an application from one provider, computing capacity from another, and outsourcing a business process to another) and move toward providers that can deliver all such aspects in one bundled offering at a pricing structure that suits the buyer’s needs. Combining all these aspects is necessary for offering on-demand outsourced services. This movement is beginning to happen now and will increase in niche areas over the next three to five years.

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