1. Infosys, Tata Consultancy Services (TCS), and Wipro achieve Tier 1 supplier status. Welcome to the rookie year in the major leagues!
Use any metric and these are the new players on the block. They have a similar number of employees as their more established counterparts. And their list of buyers is beginning to match the senior players. “Look at the types of deals they are winning,” notes Michel Janssen, President, Supplier Solutions, Everest Group. “They are competing globally and are winning large transactions.”
The challenge for these suppliers as they move into the next phase of their life cycle is: How will they differentiate themselves from each other? “They cannot be just an offshore play because in the major leagues, labor arbitrage is not a major event,” says Janssen. How will they execute? Which industry verticals will they specialize in?
Janssen predicts one of them will pass their peers in North America within the next three years.
2. GECIS becomes a spin-off, changes its name, and takes over Creditek Corporation.
GE Capital International Services was GE’s remote processing operation that serviced GE businesses from around the world through its IT-enabled services. Set up in 1997, it was the trendsetter in offshoring on the captive front.
On December 30, 2004, GE unleashed GECIS to grow on its own by selling 60 percent of its equity to two firms well known for their investments in IT-enabled, knowledge-based companies: General Atlantic and Oak Hill Capital Partners. The new company purchased Creditek, a US order-to-cash provider in July. Then it changed its name to Genpact in September.
In the past nine month the company, which is headquartered near Delhi in Gurgaon, India, won more than a dozen new clients with orders totaling $160 million and is on track to hit $1 billion annual revenues and 30,000 employees by 2008, according to a company spokeswoman. It currently has operations centers across India as well as in China, Hungary, Romania, the United States, and Mexico.
Anoop Sagoo, Executive Director, Accenture Finance Solutions, says Genpact “seems to be on an accelerated path to growth.” He says the supplier “has already gotten huge traction compared to the other Indian providers.”
“Now the outsourcing world has another global player,” says Bob Shultz, HP’s Vice President and General Manager of BPO. “It sends a subtle message: Part of the journey is going from regional centers to global centers.”
3. IBM purchases Equitant and Corio.
Equitant is an order-to-cash niche player. The purchase vaulted IBM into a top space in the finance and accounting space by filling in an importance piece of the process, according to Janssen.
Corio is an application service provider (ASP). Mike Jones, CEO of (i)Structure, says this purchase signifies “the big suppliers realize they have to get down-market.” The (i)Structure executive predicts the small-to-medium businesses are “the next big outsourcing market.” IBM is positioning to be a player in that space.
4. Consolidation among BPO suppliers accelerates.
Last year Hewitt jump-started the acquisition trend by buying Exult. The trend continued this year. Mellon sold its HR business to ACS. EDS formed a joint venture with Towers Perrin to form an HR unit called ExcellerateHRO. And CSC purchased Aon Consulting Inc. “It’s about acquiring capabilities,” says Jim Konieczny, HR Outsourcing Global Operations Leader for Hewitt. “Suppliers are searching for people with skill sets they need to build out their business.” In addition, acquisitions come with “some built-in market share.”
Suppliers come from two distinct gene pools, Janssen points out. BPO’s gene pool has process and domain expertise, and EDS’ and IBM’s have the global outsourcing gene pool and global presence. “Today the traits from both of them are required to be a winning combination,” says the Everest executive.
5. Infocrossing purchases (i)Structure.
Infocrossing announced its purchase of (i)Structure on October 25, 2005 for $81.5 million. Zach Lonstein, CEO of Infocrossing, says the purchase “raises the visibility of Tier 2 outsourcing companies.” He says the IT supplier “is still small, but not too small for buyers to ignore.”
Lonstein says Tier 2 players like Infocrossing “are more entrepreneurial, flexible, and quicker to respond” than Tier 1s. So the established North American suppliers have new competition from yet another front.
6. HR deals didn’t lose steam
“HRO continues at a torrid pace,” says Janssen. So far this year buyers inked 21 transactions according to Vipul Taneja, HR expert at the Everest Research Institute.
Konieczny says Hewitt signed 14 deals this year; by comparison there were only 20 HR deals signed in 2003 according to the Institute.
The Hewitt executive says the number of HR deals jumped this year because “HRO has entered the mainstream. It’s now an accepted business strategy.” And it didn’t help that “2005 was a difficult year for companies. They faced a lot of cost-cutting pressure,” he adds.
7. 2005 was the year of big contract renewals.
Kevin Campbell, Global Managing Director, BPO Businesses for Accenture, says many of the early contracts were up for renewal this year, the first time a group renewed at the same time. British Telecom, British Petroleum, Rhodia, and Talisman all renewed with Accenture, he notes. “This is significant because it shows the buyers are happy with outsourcing,” he explains.
8. Data security issues made news. Security and privacy became outsourcing buzz words.
This year the headlines carried news about lost or stolen credit card numbers. Identity theft became a new worry. Add to that the dreaded provision 404 in the Sarbanes-Oxley Act that can send CEOs to jail for failing to report accurate financial data.
Mark King, CEO of ACS, says security and privacy are big issues today because of this year’s new California law called The Notification of Risk to Personal Data Act, which requires any company that puts a Californian’s personal data at risk to notify them of the problem. “Almost every outsourcing service provider has some customer presence in California,” he notes. “The law is a wake-up call to the outsourcing industry. Security and privacy have become both an opportunity and a headline risk.”
“Security is now a table stakes issue,” says Phil Smith, Vice President of Portfolio Management for Global Outsourcing and Infrastructure Services at Unisys. He says that while cost has always been a driving factor, today many companies view getting best practices around auditing and control as a key reason to outsource IT. “Security has become an integrated part of the outsourcing value proposition,” says Smith.
Paul Jameson, Vice President of Marketing and Strategy for Getronics, says Getronics purchased Red Siren this year to integrate its security program into Getronics technology. “Today RFPs have 18 pages of security requirements,” he reports.
Jameson says security capability is critical for suppliers. “The threats are absolutely enormous and are increasingly exponentially. And this is one function you can’t fake. On the contrary, you’d better be really good at security.”
9. Devastating hurricanes blew in.
Hurricane Katrina, Rita, and Wilma disasters made it gruesomely clear: Mother Nature can destroy what man made in the blink of an eye. CommHub, a Unisys-integrated system for emergency management, uses satellites; it enabled the Mayor’s office in New Orleans to communicate with emergency organizations.
“I don’t think people realized how unprepared they were on basic stuff,” says King. “The hurricanes were good for outsourcing.”
Jones says organizations can’t ignore the question: Do they want mission-critical IT infrastructure in a hurricane (or earthquake) zone? Even though you can protect the technology (as long as it doesn’t flood), how do you guarantee that people can continue to work? How do you protect against a mandatory evacuation like Houston’s? Outsourcing is one good answer.
He says his sales force was flooded with calls seeking help with business continuity plans in September. “The hurricanes have already driven a couple of deals our way,” the (i)Structure exec reports.
Ed Minyard, a Unisys consultant who deployed the CommHub in New Orleans, says, “Enterprises and governments need a ready response plan that includes an ‘instant infrastructure’ in place long before disaster strikes. Communications are the key to disaster resilience. If you lose your communications, you lose your command.”
The same applies to terrorist attacks…
10. Microsoft and SAP embrace the outsourcing world.
Jones says the software vendors–the ones with the intellectual property–realize “they have to make it easier for small- to medium-sized businesses to keep their software current.” He says Microsoft began to wonder if it should sell Exchange as a product or a service. Just selling it as a product has proven that the smaller companies can’t keep current on the product; many of them are still using Exchange 5.5. But offering Exchange as a service lets Microsoft do the upgrading.
Smith adds that the software giant understands outsourcing suppliers’ value as a new channel. In addition, Microsoft knows that buyers are relying on suppliers to make procurement decisions about software, so Microsoft is working closely with outsourcers.
And SAP took small steps to become more outsourcing friendly for those suppliers using their platform, according to Janssen.
11. Oracle acquired Siebel. (Same story, different verse.)
Last year Oracle won its bruising shareholder fight to obtain PeopleSoft. Like Microsoft, Oracle “will have to change its economic model to become an automated ASP,” notes Joe Hogan, Vice President, Marketing for HP’s Outsourcing Practice. He sees Oracle, Microsoft, and SAP working with suppliers “to have us manage their software for them in outsourcing contracts. They will become subcontractors, not competitors.”
12. Multisourcing became en vogue.
This year buyers began to divide up the duties, giving different suppliers distinct portions of the process. Tim Murtha, a retired Sunoco executive, even published an online book on the subject titled “Refining IT at Sunoco: A Case Study In Multi-Sourcing.” It is a 4.5 year snapshot of how his team changed Sunoco’s internal IT infrastructure by outsourcing to four suppliers. (It’s available at www.i-structure.com.)
- a. MTA New York City Transit’s ITO deal. IBM is managing the data center and Unisys is handling the distributed environment. “Buyers often see value in multisourcing,” says Smith.
- Disney split its ITO initiative, giving half to ACS and the other half to IBM. “We have to work together and get along,” says King. He adds, “We don’t like it, but multisourcing is really smart for the buyer.”
- Dutch bank ABN-Amro outsourced its IT infrastructure and applications development to Accenture, IBM, Infosys, Patni, and TCS. The bank also outsourced the processing of its paper-based payments to Unisys.
13. Key players changed jobs.
Kevin Campbell moved from Hewitt to Accenture as a Global Managing Director, BPO.
Founder Jeff Rich left ACS. Mark King became CEO.
Monty Baker took over the HRO practice at IBM.
Keith Strodtman became Ceridian’s Senior Vice President and General Manager of HR Outsourcing.
Marc Schwarz became Vice President of Managed Services for HP Services and Bob Shultz filled Schwarz’s role to become HP’s Vice President and General Manager for BPO.