Keenan Pereira - 15 July 2010 03:34
Excellent article with extremely poignant and enlightening insights.
As Nelson Farris, Director of Corporate Education at Nike, likes to remind people, “Our business (Nike’s) is about change, and you’d better be ready for it every single day.” To Nike, being ready for change has always included recognizing that they couldn’t do anything by themselves; but that with help of the right strategic partners, everything is possible.
Now, unless you’ve been hiding under a rock or lost on a desert island for the past 18 months, there is no need to recap here the types of change we’ve seen. But according to Farris, these changes have only come to strengthen the company’s core belief that the key is to “Work with the best because they will teach you and force you to become good. “
As a result, Nike continues to expand and strengthen its strategic partnerships—its outsourcing programs.
For better or worse, we often learn more about ourselves and the wisdom of our decisions in tough times than we do in good times. As an executive I once worked for pointed out years ago, tough times are very much like placing a delicately crafted ceramic vase in a kiln—it either hardens into a beautiful work of art or cracks under the intense heat.
In much the same way, recent events have tested outsourcing as a management tool and as a profession. The economic crisis, changes in technology, political power shifts, rising environmental concerns, and general uncertainty have all led to a fundamental retesting of the assumed role of outsourcing and of the outsourcing professional.
Is outsourcing a tactic that has run its course, or a fundamental organizational shift? Are service providers really “strategic partners” as Nike believes, or are they merely outside vendors whose success or failure is of little concern to the customer organization? Can companies outsource and be socially responsible? Is outsourcing a new profession—like accounting, human resources, information technology, purchasing and others? Has globalization run its course, with most of the opportunities already gone?
To help answer these questions, IAOP is constantly surveying its global membership to understand how companies are adapting their use of outsourcing to today’s realities. Based on what we’ve learned, we now believe that outsourcing will not only continue, but accelerate in the year ahead.
One of the strongest indications of this is a comparison of data collected from member organizations last February—at the height of the global economic meltdown—to what we found just this past fall. (See Figure 1.)
Companies are certainly cost conscious, and over this period the percentage of organizations renegotiating outsourcing prices has almost doubled. No surprise there.
At the same time, however, the percentage of companies that have increased the volume of work outsourced or the scope of services being outsourced has almost tripled. Even more telling, 71 percent of our members report that they will continue or further expand their use of outsourcing in the year ahead.
Providers are seeing the same thing. For the companies that applied for inclusion in IAOP’s annual Global Outsourcing 100—a ranking of the world’s best outsourcing service providers—revenue in 2009 was not down, but actually up 5 percent. Not a banner year for an industry that has consistently seen double-digit growth, but still impressive in the midst of the first global recession since World War II.
The bottom line? Outsourcing has been tested in a period of unprecedented turmoil and is expanding, not contracting as many might have forecast.
What else might we expect in 2010? Here are ten trends to watch.
While the economic downturn had put many outsourcing deals on hold, companies are now forging ahead with renewed confidence in the stability and growth of economic markets.
“Although pricing will continue to be under pressure, outsourcing deals that were frozen will begin working their way through the sourcing and RFP process, leading to some significant new outsourcing activity in 2010,” says Danny Ertel, Certified Outsourcing Professional (COP), partner of Vantage Partners of Brighton, MA and chairman of IAOP’s Governance Chapter.
Additionally, many organizations are seeking more bundled, knowledge-based opportunities, especially when they are looking offshore.
According to data collected by Dr. Arie Lewin at the Offshoring Research Network (ORN) at the Fuqua School of Management, Duke University, almost a third of all outsourcing initiatives today are for research and development, product design and engineering services (16 percent), knowledge-based and analytical services (12 percent), and legal services (3 percent). A far cry from the traditional view of outsourcing as being for low-skilled repetitive tasks such as call centers, data entry and other back-office operations.
Not only are these initiatives getting the green light, but speed limits are being removed as well. “The majority of investments will need positive ROI within the fiscal year,” says Jay Kerley, Deputy CIO of Austin, TX-based Applied Materials. “As a result, lead times and planning cycles will be short.” Similarly, 50 percent of IAOP’s members recently reported that immediate cost savings was a key driver of today’s outsourcing deals.
This may be quite a shock to an industry where at one time large deals could take a year or more just to plan—let alone implement, get online and begin to show a return. Since many industry participants have complained for years about the excessive time and costs involved in planning and implementing large outsourcing contracts, this should come as a welcome change.
“We are seeing a lot of clients re-evaluating the business cases for outsourcing,” says Patrick McArdle, global leader for shared services and outsourcing advisory services at PricewaterhouseCoopers in London. “More are demanding flexibility, savings and innovation from their providers.”
In addition, IAOP members believe preparing for future growth is critical. Another trend identified by Atul Vashistha, Chairman, Neo Advisory, Inc. of Pleasanton, CA, is systems integration led by standardization and migration to common global processes. “Simplify is the new buzzword,” Vashistha says. In total, the value proposition around outsourcing has been reshaped significantly by the events of the past couple of years.
At the same time, the tremendous pricing pressure on outsourcing deals in 2008 and 2009 is leading some companies to realize that deep pricing cuts have damaged the business value that outsourcing brings. Providers and customers are beginning to re-negotiate contracts more collaboratively, based on the total value beyond price to regain innovation and flexibility.
“As we put the worst of the economic downturn behind us and begin to move back to ‘normal,’ companies will have to think about having agility and innovation in their businesses,” Ertel says. “Outsourcing service providers that haven’t re-negotiated contracts also will be more proactive to renew with customers.”
Providers can be expected to approach their customers and say, “Let’s talk about renewing and extensions.” Providers will want to renew and extend with existing customers rather than have them go back out in the market and seek lower rates. To do that, providers will have to also get creative about what they have to offer their customers.
When customers talk about flexibility today, they also mean the flexibility to get out of contracts. Again, this is rare in an industry where providers invest enormous resources to win the business and even more to ramp up their ability to deliver for the client. Large investments like these have always meant reasonable guarantees that if the provider is meeting its contractual obligations, it can count on being able to recoup its costs and more.
But with uncertainty still surrounding the economy, companies will hesitate to make long-term commitments with outsourcing service providers because of fear of the unknown.
“The looming economic uncertainty will lead customers to seek shorter term contracts, inflation indexing, currency exchange protection and volume band relief,” says Jagdish Dalal, COP and IAOP’s managing director of thought leadership.
Global economic uncertainty, currency fluctuations and other market forces will encourage increasing levels of mergers and acquisitions on a global basis among service providers. It’s already happening. EDS, which many credit with creating modern-day outsourcing in the technology space, is now part of HP. Perot Systems has been acquired by Dell, and ACS recently became part of Xerox.
Dalal believes the result will not only be bigger players, but better service. “This consolidation of outsourcing providers will drive higher value services and continue to put pressure on other players to be more strategic in their offerings.”
Big losers here may be what the industry traditionally calls its Tier 2 players—companies that lack the size and scope of the largest players, but who have in the past successfully won good contracts with good customers. If the gap between these Tier 1 and Tier 2 players continues to widen as some predict, the Tier 2 players may increasingly find themselves at a disadvantage, especially given tighter margins and increasing customer expectations.
According to ORN research, the number of providers for many services has grown faster than the number of companies seeking those services, creating an obvious imbalance and yet another factor that will help fuel future consolidations.
Accelerating this even more is a growing trend for customers in the financial services industry to continue to divest themselves of their company-owned captive offshore operations and turn them over to the large international providers as part of long-term services contracts.
Expect to see growth in new graduate hiring in emerging outsourcing locations, as well as wage increases of 8 to 10 percent in India and many other Asia Pacific locations. Meanwhile, U.S and Western Europe will see much smaller raises.
According to IAOP’s Global Outsourcing 100 data, outsourcing service providers grew their staffs by 7 percent last year—even in the face of a very uncertain economy.
At the same time, salary increases and additional hiring will put even more pressure on margins. “Rising inflation will lead to wage increases, creating increased pressure on margins,” according to Neo Advisory’s Vashistha. The weak dollar is another pressure point on margins in an industry where so much of the work is done in developing economies.
To help offset some of this, providers will seek to better manage their bench and drive up their staff utilization rates.
Customers are creating more jobs in outsourcing as well. According to IAOP surveys, only 14 percent of customers have reduced the number of professionals working on outsourcing at their companies, while more than twice as many (31 percent) have increased this staffing. These salaries are going up, too, as the true value of outsourcing professionals is better understood. Twenty-one percent of customers report salary increases for their outsourcing professionals, compared to only 11 percent who report decreases.
Although the overall economy will continue to dampen hiring and salaries, there seems to be no doubt that outsourcing on both the customer and provider side is a growth industry.
Rising geographies in Central and South America, as well as other parts of Asia and Eastern Europe, will begin to take market share away from traditional outsourcing locations such as India. “Offshore players will continue to expand and set up operations in new geographies, taking a share of an expanding pie,” said Vashistha.
This trend is clearly found in the ORN data as well. Call center growth is most dramatic in China, Latin America, other areas of Asia (outside of India) and in Australia. China and Eastern Europe are seeing the fastest growth in software development and areas like research and development, product design and engineering services.
It’s not just new players that are emerging in these countries, but established outsourcing providers who are setting up shop there, too. Customers are continuing to push this as well. Customers want to be able to leverage a provider’s global delivery capabilities to provide anytime, anywhere services. They also want to see their providers drive down their costs by tapping the latest talent pool, wherever in the world it may reside.
As these new destinations emerge, the competition among outsourcing providers will intensity, leading parts of the world—particularly the BRIC nations—to seek to establish themselves through professional certification at the job level, management level, and at the outsourcing professional level.
Training enables these locations to demonstrate that they have both the people and the skills to deliver the services their potential customers are looking for. Few companies today are willing to trade low wages for low skills—they want low wages and high skills. Of particular value will be training and certification programs that are internationally recognized, of which IAOP’s COP (Certified Outsourcing Professional) designation is just one example.
“Increased competition from emerging market providers also will drive a focus on services differentiation and greater intimacy with customers through outsourcing relationship management (ORM),” said Matt Shockley, COP, president and CEO of Global Sourcing Optimization Services and IAOP U.S. Ambassador.
The recent turmoil has also made customers more risk-averse than ever before. Monitoring of supplier risk and compliance is increasing, and emerging locations have to work twice as hard to overcome the perception of being risky and unproven.
The ORM tools mentioned above are just one example of how technology is starting to change outsourcing. Possibly even more important are cloud computing and Software as a Service (SaaS).
“Cloud computing platforms will change the way outsourced services are sold, purchased and delivered, resulting in greater flexibility in the delivery of services, and helping both clients and providers further optimize their outsourcing relationships,” Shockley says.
Important technological and business considerations are emerging as customers begin to migrate their operations to the cloud, including which technologies and business processes are right for the cloud, how to decide what information should remain outside the cloud, ensuring data protection, the advantages of persistent storage demand, and others.
Although there are lots of questions yet to be answered, and some sifting of real solutions from buzzwords yet to be done, Applied Materials’ Kerley sees cloud computing offerings and Software as a Service making “sizeable market share gains this year,” and thus putting pressure on traditional service offerings.
Cloud computing and SaaS may prove to be the first truly disruptive technologies in outsourcing’s history.
In the coming year, outsourcing practices will continue to be impacted by increased environmental awareness and social concerns. The industry will be called on to step up its role as a leader in corporate social responsibility globally.
“Companies will need to develop new innovative technologies to deliver sustainable products that consumers want, and also look more broadly at the impact of their outsourcing actions on a global basis,” said Julia Santos, director worldwide strategic outsourcing, Johnson & Johnson Group of Consumer Companies, and chair of IAOP’s Global Human Capital chapter.
In a soon-to-be-released survey of IAOP members, Dr. Bill Hefley of the University of Pittsburgh and Ron Babin of Ryerson University in Toronto found that 71 percent of the association’s membership believes that corporate social responsibility, or CSR for short, will become either more important or much more important in future outsourcing contracts. Many of the industry’s leading providers already have significant emphasis on CSR, and others are quickly following.
In a separate examination of companies that ranked high on IAOP’s Global Outsourcing 100, Hefley and Babin found that the companies that made the list had a much stronger emphasis on CSR than those that did not.
Top CSR issues for outsourcers are labor practices, business practices, and their human rights policies, followed closely by consumer issues, especially data protection and privacy.
Increased government regulations and the resulting need for compliance will affect outsourcing in the coming year.
“Global businesses will become increasingly aware of the new regulations and seek to establish better relationships with key opinion leaders,” Santos says.
With unemployment in the U.S. and Western Europe expected to remain high through 2010, the politics of outsourcing will not go away anytime soon. And although little can or should be done to slow the global economy—of which outsourcing is a critical component—regulations that place specific restrictions on what companies can do when trying to move work and information around the globe can be anticipated. Outsourcing is unlikely to get taken head-on, but delaying tactics and targeted efforts to restrict certain types of outsourcing, or outsourcing within specific industries or functions, are more likely.
So there they are, IAOP’s 10 trends to watch for in 2010. As an industry and profession on the leading edge of change, it’s going to be an exciting ride with lots of unexpected twists and turns. One thing, however, is certain—outsourcing represents a fundamental restructuring of business that will ultimately affect every aspect of business and every corner of the globe.
We are a little more than 20 years into this restructuring that began in the late 1980s and early 1990s in information technology. Since then it has spread across business like a tsunami, leveling everything in its path. Yet most companies still in-source about as much if not more than they outsource, so we can expect to see continued expansion of outsourcing’s impact and importance for another 20 years or so. It certainly took manufacturing about 40 years to go from an essentially insourced operation to one that is 70 to 80 percent outsourced today.
As outsourcing grows, so will the need for outsourcing professionals to take a leadership role in defining and crafting how their organization goes about it and how quality results are ensured.
Michael F. Corbett is Founder, Chairman and Chief Strategy Officer for IAOP, the global standard-setting organization and advocate for the outsourcing profession. This article is based on insights shared by many of its members from around the world.
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