Outsourcing Center asked leading outsourcing service providers about their predictions as to the biggest changes that will impact outsourcing buyers over the next five years. Their answers clearly point to a need for buyers to alter their thinking about how, when, and why they engage with providers of outsourced services.
Extreme performance requires elasticity
Joanne Olsen, SVP, Oracle Cloud Services, believes the biggest change will be the "introduction of complete systems as opposed to a myriad of components that companies must integrate, yielding a complex, brittle architecture that just won't stand up to the requirements of the 'new normal.'" That "normal" necessitates that outsourcing solutions bring speed and flexibility.
Olsen comments that, in some ways, not much has changed from the way it was over the last five years – organizations still need to try to do more with less. However, the competitive field for solutions that address this need is changing due to new cloud solutions.
She says that during the next five years buyers will need to look for hardware and software solutions that have been engineered to work together in a manner that facilitates "extreme performance, reliability, and scalability, enabling companies to consolidate tens, hundreds, or even thousands of servers and applications onto a single, consistent, elastic cloud foundation." In a nutshell, it's much higher performance at a lower cost plus the assurance of less risk than if clients were to try to achieve these objectives on their own. (Also read Assessing the Coming Impact of Cloud Computing on Outsourced Solutions.)
New risks from mixed delivery models
Russ Daniels, Chief Technology Officer for HP Enterprise Services, says "the very structure of our industry is changing. The vision of 'Everything as a Service' is solidifying into new market offerings that will both satisfy and generate new demands for technology-enabled services."
As buyers of outsourcing services opt for these new offerings, their expectations need to change. Daniels says that, more often than not, buyers' business models, operational models, and even company cultures will change as they move to a highly automated, standardized, configure-to-order delivery model.
He predicts this will lead to an increase in organizations seeking consulting expertise to guide them through this paradigm shift. Daniels points out that CIOs already have contradictory advice and pressure. "While many sources say a move to the cloud and investments in new technologies are imperatives for success, there is still operational pressure to control costs by sticking with current, traditional systems."
Daniels says the answer to navigating the paradigm shift is adopting a combination of choices based on the unique needs of the individual organization. Buyers should look at options that blend current systems and processes with emerging options. And they will need a "hybrid" IT environment – a mixture of in-house, shared, outsourced, cloud, Web-based, and mobile services. Each has different economics, and each will facilitate a different way of doing business that was previously cost prohibitive.
With this vast increase in service-delivery options, buyers will need discernment in the complexity of selecting the optimal source for each service. They also will need to know when to shift from one source to another in order to assure services meet their evolving business requirements.
Ritesh Idnani, COO, Infosys BPO, warns that outsourcing choices are inherently complex – and becoming more so. It's no longer a simple matter of choosing between a strategic partner and a cost-effective provider; companies will need both characteristics in the same provider in order to stay innovative and enhance their business effectiveness.
"Given complexities and risks, companies will no longer be able to compare service providers on an 'apples-to-apples' basis," says Idnani. "They will need to take a longer-term perspective and consider all the strategic sources of business value that a provider can deliver in helping them on their transformational journey."
Abid Ali Neemuchwala, Global Head, TCS Business Process Services, says that the emergence of providers with multifunction expertise will lead to buyers "increasingly wanting to build a symbiotic relation with one or a limited group of providers that can meet their business requirements and also provide services on tap."
Robert Pryor, Executive Vice President of Sales, Business Development and Marketing at Genpact, ties it all together: He advises that "Companies should change their mindset and start viewing their service providers much more strategically in terms of innovation and transformation. They will need to look for providers that will take a more proactive approach to driving step-fold improvements across an enterprise rather than incremental increases in individual areas."
Stepping away from limited thinking around costs
Cognizant's Chief Financial & Operating Officer, Gordon Coburn, says the single most important change in the next five years will be the focus on intellectual arbitrage. "Outsourcing's value equation is moving to a new phase beyond simply improving existing outcomes or making them cheaper," he states.
Gene Byrne, General Manager, F&A & SCM Solutions, North America, IBM, says the market is shifting to a focus on delivering higher, sustainable value on an end-to-end basis. Over the next five years the BPO industry will have to address a value proposition with limited labor arbitrage. Organizations that were early adopters of BPO are now asking: "How do we maximize the benefits of outsourcing beyond labor arbitrage?" and "How do we drive innovation in our outsourced business processes?"
The mindset for the two value equations is different. Coburn says companies that are in a labor-arbitrage frame of mind ask: "How can we achieve the same outcome for a lower cost?" In contrast, companies thinking about intellectual arbitrage ask: "For the same cost per transaction that we incur today, can we produce a dramatically different outcome?"
For intellectual arbitrage, business executives should step back and ask: "Why are we doing business this way? Can we do things very differently and achieve a very different experience for our customers if we have access to skills, expertise, and talent at price points that were not possible previously?" If so, Coburn explains, they can enable new services or capabilities that achieve a totally unexpected outcome.
Idnani at Infosys BPO cites multiple factors as the drivers for intellectual arbitrage – primarily an increasing focus on differentiation for new markets, new business mandates, as well as regulatory and environmental factors. Markets are constantly changing, as are companies' demands. He says intellectual arbitrage is causing "an evolution in expectation alignment."
Going forward, service providers must continuously evolve up the value chain, says Don Schulman, General Manager, Global F&A and SCM, IBM. "The value equation now must deliver cost optimization, stronger compliance and controls, improved business outcomes, better business agility, and end-to-end process harmonization that offers new ways to enable innovation."
Schulman says it will matter whether an organization selects a service provider that can provide insight and visibility driven by integrated analytics. "This information will enable rapid, actionable business decision making while, at the same time, eliminate work activities and reduce costs."
The globally connected economy makes intellectual arbitrage possible. "Companies can analyze and deconstruct each step of any process to determine the most appropriate location around the globe best suited to perform it at a given point in time," says Coburn at Cognizant. "It's a powerful paradigm shift and can introduce major process breakthroughs."
The shifting provider landscape
Katrina Menzigian, Vice President of Research Relations at global services advisory firm Everest Group, believes buyers will need to be "on their toes" for the next couple of years as service providers reposition and redefine what they offer. She says buyers also need to take into account that "providers will be entering and exiting specific markets as market requirements increasingly demand broader sets of capabilities and as differentiation requires more distinctive strategies."
Rajan Kohli, CMO at Wipro Technologies, says the shift happening in the provider landscape will present buyers with options from non-traditional players. He adds that the market will no longer "permit status quo. Buyers need to be of aware of new delivery models. It will also be essential to shift their mindset to value-based sourcing as opposed to cost-based sourcing decisions.
Pinstripe's Executive Vice President, Angela Hills, agrees that the provider landscape will become even more competitive, which will cause an increase in partnerships, mergers, and acquisitions among providers. This will especially impact buyers with a global footprint that "want to work with a single provider instead of having relationships and points of contact with multiple providers."
Byrne at IBM concludes new adopters of outsourcing will be able to "leapfrog their predecessors, capitalizing on the labor arbitrage opportunities that remain, while driving end-to-end value through innovation and optimization in the new services paradigm."
The changes predicted for the industry will completely transform the way work gets done, but the changes won't happen overnight. And there will be risks. (Read Eight Biggest Areas of Risk for Buyers and Assessing the Coming Impact of Cloud Computing and Buyers Face Decisions around New Opportunities and Risks in Outsourced IT Solutions.) Daniels at HP Enterprises advises buyer organizations to create a plan to leverage the new paradigm.
"Done right, it can be a transformational change without a complete rip and replace," Daniels explains. "It's the opportunity to start building things differently to get radically different results."