Outsourcing predictions for 2009

Yes, it's that time again folks, when analysts come up with profound verbiage that gets everyone excited for a few days, and hope no-one re-reads in 6 months.  Well... I occasionally do some research in my spare time, so here are some thoughts on what we can probably expect to see happen with outsourcing adoption in 2009: 

Low-hanging fruit outsourcing with immediate cost-savings will be strong.  As we discussed and surveyed here, it's areas where enterprises can streamline initial costs over a contract and get an immediate impact on the bottom-line.  That's bread-and-butter application outsourcing, high-arbitrage BPO areas such as F&A and vertical-specific analytics (that KPO stuff).  I am also expecting increased adoption of procurement BPO models as increased procurement and supply management work is moved offshore, and buyers can benefit from labor arbitrage to underpin the transformation costs that have held back adoption in the past.  Many initiatives which require incremental upfront investment that cannot be tied directly to revenue-metrics will suffer.  The back-end of Q1, Q2 and Q3 2009 will be busy times for outsourcing deal activity. 

The onshore/offshore decision-process is reversed to "why should this stay onshore?"  The traditional evaluation methodology for companies' outsourcing and offshoring opportunities is fast-changing.  Rather than companies determining which processes can be carried out from a remote location, most will be determining why processes need to be carried out onshore.  

Services firms will be forced to consolidate.  With deals getting smaller and more plentiful, combined with renewed pressure on services firms to hold-back on hiring, the need for added global scale and staff resources, process and technology expertise, are going to drive consolidation at a much more aggressive pace than we saw in 2008.  Most outsourcing service providers are currently waiting out the year to get a firm picture on how to address their go-to-market strategies after the New year.  I predict these to take several forms: 

• Large providers going for a pure scale-play.  Like HP/EDS, we will see more mega-mergers to ramp up into that "mega IT-BPO" provider bracket.  The "big 3" could pull away from the rest of the market for some mega-deals and we will likely see other service providers combine to challenge. 
• Captive cherry-picking.  There are some high-quality captives that are ripe for acquisition, that can give providers immediate entry into new industries, or consolidation in existing ones.  In many cases, it is more appealing for service providers to invest in buying up clients than each other, but further devaluations in the stock prices of many service providers will create tough investment decisions for ambitious providers. 
• Increased blending of IT-BPO offerings will drive vendor acquisitions.  In many situations today, BPO is becoming a natural extension of an ITO relationship.  This is especially the case where the service provider is willing to take on industry-specific processes that augment the IT services, for example supply chain merchandising with retailers, or check-and-lockbox services in financial services.  There are simply not going to be "world-class" captives for sale to fulfill every industry need, which is going to force many providers to seek mergers.  I anticipate some strategic acquisitions between BPO-centric and IT-centric vendors.  Those that choose to remain as pure-IT, or pure-BPO will get forced into the middle-market to scrap for smaller engagements.

 

Global HR strategies are moving to the top of the agenda.  As we have discussed-to-death on this blog, one of the most redeeming facets of outsourcing is to become more competitive globally, to use a service provider's skills and resources to enter new markets, or divest from others.  One area of note has been the increase in firms moving onto global HR models where they have a much more integrated view of their global organization and can make much faster, more informed, decisions about their business and their workforce.  The recent revival in global payroll and HR-IT outsourced services is testament to this growing need for firms to globalize their workforce data.

Survival of the fittest.  Let's not beat around the bush here... we're in for a very tough economy, budgets are being cut across the board and companies won't be increasing their spending on IT and business operations.  They are going to use outsourcing as a vehicle to save money, and - hopefully - increase their competitiveness.  So, while we can expect to see increased spending on lower-cost services with a strong offshore element, we are already seeing many areas of planned spending put on hold - for example, costly software upgrades, or business transformation initiatives. Hence, the competition for the outsourcing dollars is going to be increasingly intense as revenue opportunities for services firms are already drying up in other services markets.  Many of the smaller service providers, which are more focused on staff-augmentation delivery and discretionary projects, are going to struggle.  

At the same time, it's a great opportunity for the well-resourced providers to edge out smaller low-cost competitors and increase market share as they use this tough market to their advantage.  Shaving small portions of cost isn't going to make a huge difference to many firms - they will have to make bold and radical decisions to survive.

Mumbai events test appetite for offshore

My esteemed colleague at AMR Research, Dana Stiffler, who works with me in our Global Business and Outsourcing Services practice, has compiled some thoughts about the recent atrocities over in Mumbai, which we wanted to share with you, discussing the impact on the offshore sourcing industry... over to you Dana:

India's financial markets, including technology company stocks, bounced back admirably following last week's terror attacks in Mumbai. 

Initial conversations with Western customers of India’s large and mid-sized IT companies indicated no plans to scale back operations. There will, however, be a marked decrease in the frequency of Western employees’ travel to India in the near-to-medium term, a trend that was already in evidence prior to the attacks due to financial pressures and travel bans.

 

We’ve already experienced this first-hand as AMR analyst Phil Fersht had to cancel his trips to Mumbai and Chennai this week. Looking ahead, the level of participation in the Indian IT industry’s premiere NASSCOM event, held in Mumbai every February, is also uncertain. It’s about dangers perceived and real: While the attacks had no impact on service levels delivered from Indian locations, nearly all Western visitors involved in the outsourcing industry out of Mumbai have at one time or another had lunch at the Taj, or snapped photos of the Gateway of India and Chhatrapati Shivaji Terminus (formerly Victoria Station). 

While the situation in Mumbai creates a heightened sense of uncertainty and risk associated with doing business in India, as long as this proves to be an isolated incident, AMR Research believes the outlook for Indian technology and business services vendors is largely a healthy one. However, further coordinated attacks, especially any affecting other major business and IT hubs such as Bangalore, Hyderabad, Chennai, or Delhi, could alter this picture and cause a much more adverse impact to the Indian outsourcing industry. 

Most large, global companies are so vested with captives and outsourced operations in the region, they would find it difficult to start pulling work back. Besides, there is no other single location where the combination of resource numbers, quality, and cost are as attractive. Some potential challenges? The negative perception of mid-sized or smaller prospective clients who have been thinking about offshoring is one. These companies will, understandably, be scared off, or at the very least, delay the decision-making process. Another potential issue: Reducing travel of U.S. or Europe-based executives and project resources could put a dent in relationships, slowing down knowledge transfer and extending transition maturity curves. 

From a big-picture perspective, we were already seeing intense interest in global delivery strategies that incorporate locations in addition to India. The events of the past week put an added onus on Indian and other global ITO / BPO providers with large Indian operations to locate incremental resources in other locales, such as Latin America, lower cost US areas, and additional Asian locations. Overall, service providers with more distributed global delivery networks will have an advantage over those relying 100% on India-based delivery. 

  Dana Stiffler is a Research Director at AMR's Global Business and Outsourcing Services Practice

The Change Imperative: It's Back-to-Basics Time

In a nutshell, we have reached a crucial juncture in our economic history:  gone are the days we can borrow whatever we want to subsidize ambitious business ideas, buy houses we cannot really afford, or fritter money away on expensive holidays. Walking down Boyslton Street at 7.30pm on Friday night - one of Boston's prime restaurant areas - every restaurant had vacant tables and was taking walk-ins.  It really hit home to me that things have finally changed.  Years of over-spending have finally caught up with us and we're now feeling the pinch.  But whether this was to be a rapid banking meltdown, or a long painful slowdown, this had to happen eventually.  

I recall sitting on a panel at at outsourcing conference in New York City back in 2004, and there were protesters outside, demonstrating their frustration about US jobs "moving offshore".  In response, a sourcing attorney declared, "outsourcing provides a great opportunity for the US - we can offload low-value jobs and focus on higher-value, more innovative work".  I recall thinking to myself, even then, that that argument didn't quite add up.  

While it sounds like a nirvana, the reality is we're competing globally for labor, for making cheaper, better cars, for delivering good quality IT services, for delivering quality finance, HR and supply chain support.  If the US is to truly deliver "higher-value", the government needs to invest in education programs that develop this talent.  The reality is that the rest of the world caught up.  People in Chennai, Manila, Bucharest, Guatemala City, Guangzhou etc are being trained to compete with American, British, French and German workers, and the Internet and new technology have been a huge enabler to make this happen.  A good friend who works for one of the leading India-based BPOs confided in me recently, "we should bring over the training leaders from the top Indian outsourcers and have them work with US businesses to get their act together".

What continues to irk me, is the fact that industry has become so focused on making its quarterly numbers that it has taken its eye off the long-term picture.  We saw this financial meltdown coming - and did nothing (wasn't the Asian crisis of the '90s warning enough?).  We are seeing further deterioration of the environment - and still do little.  We saw the US automotive industry grind down to its current predicament - and have done nothing.  And we are seeing the IT and BPO industry rapidly develop across the globe - and have blissfully ignored it to meet these cost-containment targets.  

And how to we respond?  Bailouts.  We're now talking about bailing out the flagging automotive industry.  How did it come to this?  Years of greed, a deterioration of our work-ethics, and eager developing nations determined to get a taste of what we have.  It's as if we had a major cardiac arrest and are now hoping we can recover fully from open-heart surgery.  

And this time when we do recover (and we will), we simply have to make sure this never happens again.  Some will argue this is all about natural economics of globalization and a free market - and they are probably right.  However, this time we have truly reached an inflection point.  

It's about accepting we now operate in a global economy and that we are competing at a level where we need to work as hard, and as smart, as the next nation.  I hope President-Elect Obama can help instill a new work culture in the US.  The US people have spoken that they want change, and they have voted in a President promising change.  The core question now is whether they are really prepared to change.