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Research & Insight

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The Big Challenge that Will Reshape Outsourcing

Outsourcing Center, Kathleen Goolsby, Senior Writer

With industry experts predicting such a high degree of change in outsourcing over the next five years, Outsourcing Center asked Peter Bendor-Samuel, an industry pioneer and thought leader, for insights and predictions as to exactly where the industry is headed and what’s driving that movement. Bendor-Samuel, CEO and Founder of Everest Group, an advisory firm on global services, positions the upcoming changes in the context of past and current trends. He says the big issues that shaped the outsourcing industry over the past 10 years were “Should we do it?,” “How should we do it?,” and “Who should we do it with?” That resulted in outsourcing a lot of work to India due to the catalyst of labor arbitrage. The value of low-cost labor through offshoring resulted in restructuring the delivery of services “in a pretty profound way,” he points out. Economic impacts on outsourcing spending Two big issues – one cyclical and one secular – are now affecting outsourcing. The cyclical issue is the global recession, which significantly affected outsourcing buying patterns in that it postponed both discretionary and structural spending. “As we move into a slow-growth period coming out of the recession, the discretionary spend is returning,” states Bendor-Samuel. “That’s why we currently see significant growth, particularly in the offshore Indian players. They are participating in a very significant bubble of discretionary spending on inevitable IT and process reengineering that companies postponed during the past two years.” The cyclical discretionary spending is normal when coming out of a recession. However, Bendor-Samuel notes normally a roaring economy picks up after a recession, which results in a smooth trajectory after a pent-up bubble of discretionary spending. “But the roaring economy isn’t happening this time. So I believe it’s highly likely that in the second or third quarter we’re going to see a slow-down after companies work through the discretionary spend bubble,” he says. Unless the economy recovers much more robustly than in current indications, he says outsourcing spending levels will drop back to normal or drop to levels consistent with a weak economy. Weak economic activity will bring a slow-down in spending on services. “This is contrary to what people believe will happen in the industry,” states Bendor-Samuel. “They believe that we are coming out of a recession, spending is coming back strongly, and the spending will continue. But I think there is a very good chance that it will slow down next year.” Industry impacts on outsourcing spending The secular issue in play is that the third-party outsourcing industry was already moving through – and has now moved very decisively from – a high-growth phase to a mature phase. He explains that the big challenge over the last 10 years was how to rework service delivery to accommodate the disruptive nature of labor arbitrage. The industry has moved beyond that. Both buyers and providers know how to succeed at outsourcing and offshoring now; they know how to manage it, and they’re comfortable with the model. But therein lies a problem when it comes to spending. “The trouble is we’re approaching saturation,” explains Bendor-Samuel. “The rate of growth of movement to the outsourcing model has slowed tremendously, particularly for the large commercial companies. Spaces such as ADM are clearly mature and are unlikely to grow significantly and continue fast growth.” Just around the corner: market share shifts In this mature industry, the challenge is no longer how to stand up a service factory and manage delivery. “The big challenge for the next five years will be effectiveness – how to make this work better,” says Bendor-Samuel. A strong sign of this movement, he says, is portfolio rationalization. Companies are reducing the number of providers in their portfolio. “The reason to move from more to fewer is because of wrestling with effectiveness,” he states. He adds that this is why the captive model isn’t dead even though some industry experts predicted that would happen. “That proved to be completely wrong, and those who predicted it made one of the great bad calls of outsourcing history,” he says. “Rather than dying, there is movement back and forth between shared services and captives and third parties. Captives have re-cast themselves and clearly have a role in helping a service delivery organization become more effective.” Focusing on driving more effective services will involve questions such as “How do we make a service more responsive,” “How do we integrate a service better?” and “How do we make this work better for the business?” Achieving greater effectiveness in outsourcing will be the mega trend over the next five years, and Bendor-Samuel predicts this focus will create shifts in the service providers’ market share. It will also create new green field opportunities as well as opportunities for reworking the brown fields. “The effectiveness challenge and its opportunities will fundamentally change the competition in the outsourcing industry. There will be new winners and losers as the provider landscape consolidates because of this trend,” says Bendor-Samuel. “Greater effectiveness will be the industry-wide prism through which companies view services over the next five years.”  

Hot Spots for Growth in Outsourcing

Outsourcing Center, Kathleen Goolsby, Senior Writer

Which industries will experience growth in outsourcing in the next few years, and what risks will buyers of those services face? Are there business processes or functions that will begin turning to outsourcing in the next two to five years? What value opportunities and risks will they bring? In what geographic regions will companies begin adopting the outsourcing model? Outsourcing Center asked leading service providers for their predictions about these hot spots for growth in outsourcing. Here’s what they shared with us. Nearshore, offshore, onshore, best shore Although “nearshore” is a favorite model and buzz term bandied about in outsourcing news and advisories today, it will soon fall by the wayside. First of all, it’s a misnomer. “Nearshore” to Japan, for example, is China or Vietnam; but those two service delivery locations to U.S. and European businesses are “offshore.” Brazil is a nearshore provider but also a large onshore provider. Genpact predicts nearshore service delivery centers will likely continue to grow, but not as significantly in dollars or percentages as the offshore centers. According to Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, we’ll likely see an increase in the use of onshore centers. “Federal, state, and local governments will drive this growth in terms of the attractiveness of incentives they create to stimulate domestic job growth.” Deepak Patel, CEO, Aditya Birla Minacs, says the decision between nearshore, onshore, or offshore is “not so much about achieving scale but, rather, is about delivering the right value to companies by providing the ideal mix of the right delivery destination and the right knowledge set available. In the coming years, newer geographies will emerge, but smart outsourcers will choose the destination that brings the most value.” John A. Haslinger, Vice President, Product Marketing at ADP, says, over time, he expects labor arbitrage advantages will remain but increasingly companies will balance them against the need for particular skill sets. In HR, for instance, “companies will balance labor arbitrage with the service provider’s ability to foster long-term relationships.” Allied Digital Services’ President, Kevin Schatzle, believes nearshoring will increase over the next two years because outsourcing in general will increase. He predicts that in five years, as the industry matures, Canadian pricing will start to approach U.S. costs. Gordon Coburn, Chief Financial & Operating Officer at Cognizant says globalization initiatives are evolving “from a point-to-point delivery model to a many-to-many model where the provider delivers from many locations in the world to a client’s locations in many other parts of the world.” Rajan Kohli, CMO, Wipro Technologies, adds that “best shore is the way to go. That may mean a combination of nearshore and offshore, or it may mean just offshore. Buyers will need to make decisions based on cost, business value, and business availability.” Ritesh Idnani, COO, Infosys BPO, says “the trend of nearshoring will continue to gather steam. But the global economic landscape has definitely mooted the call to a more protectionist outlook by countries, and that trend will continue in the short term. They will, however, have to bear the brunt of continuous monitoring to ensure they continue to be cost effective and build in efficiencies. The ‘offshore train’ left the station several years back; hence, offshore will continue to grow in volume and market share.” Dina Kholkar, Head, BFSI, TCS BPO Services, predicts that the definitions of onshore, nearshore, and offshore will blur over the next couple of years because providers “will increasingly expand their base to build a global network delivery model to address the diverse demands. There will also be an increasing creation of Centers of Excellence by function,” she states. The future shift from focusing on nearshore / offshore / onshore debates is nowhere more evident than at HP where there is now a “Best Shore Services” division. Even so, Jeff Womack, Vice President Global Enablement, HP Best Shore Services, says HP believes that nearshoring will “continue to have a seat at the global delivery table because companies – especially in the European Union region – will want the cultural affinities and languages as well as aspects of data privacy.” Womack also points out that some nearshore locations are already maturing to the point that they no longer meet the requirements to qualify as a true nearshore location because costs begin to reach parity with major markets such as the United States, Western Europe, and Japan. Yugal Joshi, Senior Analyst, Everest Group, says that, “with offshore suppliers seeing their tax exemptions going away, the cost-effectiveness of their large offshore centers will reduce significantly, which will prompt them to go nearshore.” Don Schulman, General Manager, Global F&A and SCM, IBM, predicts nearshoring will grow in the short term because organizations will continue to perform high-level activities (such as budgeting and corporate tax) discretely and locally – regardless of whether shared services or outsourcers are doing the work. “This is less about nearshoring and more about growth due to more complex work moving into a shared-services environment,” Schulman explains. “Success in outsourcing has led to this kind of work moving to a centralized environment. Organizations are beginning to look at their shared-services strategy as a hybrid model. It is not an either/or decision but, instead, a multi-dimensional approach that leverages both internal shared services and outsourcing.” Industries with increasing growth in outsourcing Nearly all of the service providers whom we tapped for insights anticipate that the U.S. healthcare industry will experience a dramatic increase in outsourcing over the next two to five years. Pryor at Genpact says the significant cost pressure and large number of additional people that will need coverage will require that the industry adapt rapidly in leveraging technology, outsourcing, and reengineering to change business models and cost structures. Most of the executives we interviewed also predict a large uptick in government outsourcing in the next few years. Schatzle at Allied Digital Services says government and education will migrate to outsourcing for IT support and “will receive great benefits of modern approaches.” He advises …

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