1. Hewitt Associates buys Exult
“Consolidation in the HRO (human resources outsourcing) space is under way,” says Karen Bowman, President of Employee Care for Convergys. She predicts over the next 18 months the industry will shake out and the global leaders will emerge.
Kevin Campbell, an Exult executive who is now Market Strategy and Development Leader for Hewitt’s HRO business, predicts this year one of HRO’s top five suppliers “will quietly go away.”
Bill Matson, General Manager for IBM HR Business Transformation Outsourcing, says some of the consolidation will be “hard-wired” like the Hewitt/Exult merger, but others will be tight-knit alliances. “The days of casual dating among suppliers will diminish,” he says, since suppliers will have to integrate their technologies so the process is seamless to the buyer.
Joel Friedman, President, BPO portfolio of businesses for Accenture, sees a consolidation of not only companies but contracts. “We will see a handful of the big players become bigger,” he predicts. At the same time a few niche players will retain their dominant position, like ADP in payroll or First Data in credit card processing.
David Hudanish, a partner at Mayer, Brown, Rowe & Maw, says he’s intrigued that two niche players formed a union. “I would have thought IBM, Accenture, or CSC might have bought either one,” says the outsourcing attorney. He predicts the combo “will become an HR powerhouse.”
Matson believes buyers will expand their scope in their HR transactions this year. He says this merger was those organizations’ response to the fact that scope has increased in the marketplace. “The combined organization has a much larger offering,” he points out.
Campbell says the merger “added legitimacy to the industry.” Before he saw some buyers approach HRO “with trepidation.” Now he says they are more comfortable since they are sure “HRO is here to stay.”
2. The TXU Deal
In May Capgemini inked a US $3.5 billion (in total contract value) deal with TXU Corporation. Hudanish, who was the lead attorney for TXU on this deal, says it appears to be one of the largest outsourcing deals in 2004 and may be the largest BPO deal on the books.
Size is not the only reason why this deal was important. It manifests another trend: bundling IT and BPO in a multi-process deal. TXU outsourced its human resources, finance and accounting, procurement, customer relationship management and customer care, revenue management, the supporting IT as well as stand-alone IT. “This year you will see more buyers of TXU’s size looking at this type of deal. I think big companies may stop outsourcing IT one year and then other business processes in the following years,” Hudanish predicts. Instead, companies will look across the enterprise at all the deals that make sense and devise a sourcing strategy to get the deals done in a complementary manner.
Terry Jost, Vice President, Outsourcing Services Business for Capgemini, says the TXU deal showed “buyers are willing to take a broader look at their options so their outsourcing initiatives can affect their organizations more substantially.”
Hudanish says the TXU deal shows buyers are not afraid to outsource multiple processes to one supplier who becomes responsible for end-to-end delivery. “If there is a service failure, it is far easier for a company to turn to one supplier and say ‘Fix it,'” according to Hudanish. He adds, “If multiple suppliers are involved, there is often finger pointing among them.”
Friedman says Accenture is also seeing quite a few multi-tower deals in its pipeline. Buyers like the idea because it simplifies managing the relationship. “But there is a downside,” he says. “These deals are very complex and that creates challenges for both sides.”
So, will they work? “We are now going to see if a multi-tower IPO/BPO deal can work,” says Mike Atwood, Industry President for Everest. We’ll check in next year at this time and find out!
3. EDS Becomes a Fallen Angel
According to Michel Janssen, President, Supplier Solutions for Everest, EDS “is suffering from a significant crisis of confidence and future direction. But its financial viability, at least for the near-medium term, is not in question.”
Michael Whitacre, Outsourcing Sales Leader of Acxiom, says that EDS’ financial challenges were a major milestone of 2004. He says buyers may become “gun shy” about giving mega deals to one supplier; he predicts parsing out processes a la the Proctor & Gamble deal might become the norm if buyers become skittish.
“You can never forget the financial stability of a supplier is always important,” adds Patty Rosewater, Director of Strategy and Planning for HP Managed Services within HP Services. “Buyers need a partner with financial stability if they are going to develop a long-term partnership,” she adds.
Todd Furniss, Everest COO, says EDS’ loss of market share was CSC’s gain. This year other suppliers may also swoop in.
4. India Comes Into Its Own
Mark King, ACS President, says in 2004 India emerged “as a viable location, provider, and supplier of IT talent.” But, King adds, most large, multi-national enterprises require proven global infrastructure and delivery capabilities from their outsourcing service providers in order to be successful.
2004 was the year India moved from short-term project work to “becoming a viable alternative to ADM (applications development and maintenance),” adds Terry Jost. Until this year Jost says 90 percent of most Indian supplier revenues came from short-term projects. He predicts the Indian suppliers “will see even more momentum in the ADM space in 2005.”
Offshoring, of course, is a two-way street. This year HP Managed Services defeated local Indian firms to win the Bank of India contract, a US $150 million deal to develop infrastructure and a new ATM system.
5. Dell pulls its call center from India
2004 was also the year when buyers learned not everything can be sent offshore. “I think we’ll see more of this happening as customers complain about quality of service issues. Sometimes the low cost countries can’t hire employees who can solve the problem,” says Marilyn Nelson, Practice Director For Network and Desktop Outsourcing Solutions for Getronics. She says consumer companies this year will continue to move more of their customer-facing operations to higher cost offshore locations where the cultural compatibility is better. One place the US and UK companies are turning: South Africa.
6. Confusion about the “O” word
The American public’s confusion of outsourcing with offshoring in a highly politicized election environment was particularly maddening for those of us who knew the difference; I personally wanted to throw lemons at the TV!
King says this obfuscation “slowed the growth of outsourcing and drove its discussion underground.” Now that the election is over, he expects “service providers with global infrastructure and delivery capabilities to benefit from global sourcing in 2005.”
Dan Masur, a Partner at Mayer, Brown, Rowe & Maw, says “it’s a testament to the enormous savings provided by offshoring that it survived and prospered this year in face of the election-year flap.” He too predicts “a huge leap forward in 2005.”
7. JPMorgan Chase cancels its IBM contract
In September JPMorgan Chase announced it was pulling the plug on its December 2002 outsourcing contract: a $5 billion deal to outsource much of its IT to IBM in a seven-year deal. The 4,000 employees who joined IBM will move back to the bank this year.
The consensus is the bank’s merger with Bank One on July 1 is the reason for the pull out. Bank One Chairman and CEO, James Dimon, never a fan of outsourcing, believes IT is a core competency for a bank and therefore not a candidate for outsourcing.
Hudanish says the lesson here is to pay attention to those termination clauses in case a merger or other significant event radically alters the landscape.
But there are other lessons here, too. Mike Jones, President and CEO of (i)Structure, speculates IBM was fine with JPMorgan Chase taking the work back. “I think they were struggling to make the finances work. I think if EDS could go down the same path with its Navy contract, they would,” he says. Campbell adds “execution was the issue in the JPMorgan Chase deal.”
Jones points out these two IT deals (the Navy was a $6.9 billion deal), which are the biggest in the IT world to date, demonstrate “how hard it is to get a handle on actual cost until you get there.” Given the difficulties after the fact, he says “the only thing you know for sure is that the winner bid too low.” Jones says his team struggles with this issue on every deal on which it bids. This year he predicts the “big guys will be less aggressive in the marketplace.”
8. The Oracle and PeopleSoft scrap
On December 13 PeopleSoft ended the 18-month-old fight and accepted Oracle’s bid. The merger makes Oracle the second largest business services software provider behind SAP.
Glenn Davidson, Chief of Market Strategy and Corporate Development for Accenture HR Services, says the fight about the enterprise resource planning (ERP) providers showed buyers they face risks when not outsourcing processes like their HR. “The software platform becomes our risk when you outsource,” he points out.
Campbell notes “that the biggest competitor to outsourcing is for companies to do nothing.” Those companies often had business leaders who nixed outsourcing “because they felt they could go to PeopleSoft and get everything they needed from them,” according to Campbell. The protracted squabble helped companies redefine the software risk and move more firmly into the outsourcing camp.
9. The biggest venture capital BPO funding of the year
Yes, Virginia, BPO companies are still banking checks. OfficeTiger received $50 million in third-round funding from Francisco Partners. The BPO provider claims this is the largest venture capital investment in a BPO firm in 2004. OfficeTiger provides industry-focused information creation, management, and distribution services for investment banks, financial services firms, law firms and in-house legal departments, and print and publishing houses, among others. This includes composing pitch books where a third of the deadlines are under an hour. Currently seven of the top 12 investment banks on Wall Street are on its buyer roster. The company has offices in India, Sri Lanka, US, UK, and Continental Europe.
10. The arrival of globalized service delivery models
While suppliers have talked about it for awhile, this year they actually were able to deliver services on a global basis. Suppliers are now able to integrate offerings for North America, Europe, and Asia. Of course, this is what the Global 100 are demanding. Bowman says in 2004 about 30 percent of its buyers wanted a global delivery model. This year that number is already at 50 percent.