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 of 2011 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 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.”