Horses outsourcing predictions for 2009

Ingsoc Yes, it's that time again folks, when analysts and other industry wannabe needle-movers come up with some profound verbiage that they think 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 (just don't bookmark this page and hold it against me):

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 acquisitionsbetween 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.

Horses

  He had to go and do some didn't he? 

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11 Comments

  1. Posted December 14, 2008 at 7:30 pm | Permalink

    Phil,

    Looks like you have taken the words out of my mouth from a white paper I did back in August, a presentation that I did in October (Shanghai) and an updated presentation at our C-Level workshop in Beijing and Quandao this week.

    I hope that our predictions are true and that this will result in positive effects for both suppliers and the buyers who so greatly need expense relief & bandwidth expansion.

    - Jerry

  2. Vikram Venkateswaran
    Posted December 14, 2008 at 11:20 pm | Permalink

    The coming year would see a cautious wait and watch policy by most firms. The out sourcing trends I see so far emerging is the increse in the number of pilot projects just to test the waters before any firm decides to out source major chunks of work.

    The pilots are replicas of the main work though they are much more scaled down and last anywhere between 12-15 weeks.

    The out sorcing on the non core businesses would continue but core businesses would continue to be out of this bucket, with incresing instances of staff augmentation to compensate for any lack of skill sets at the firms.

    Vikram Venkateswaran

  3. Malvina Ashok
    Posted December 15, 2008 at 4:38 pm | Permalink

    Phil,

    My add- on from HR perspective in addition to your views:

    *Getting Extraordinary Results from Ordinary People.

    *We will need to ask if there will even be a role for Human Resource in the 21st century or whether HR will exist in a recognizational form.

    *HR will need to be able to add significant and mesurable value to the bottom line of the organisation.

    *HR strategies will need to siginificantly ehnance competative advantage,not simply that they are efficient or ‘best-in-class’

    *Operating a HR function globally which aligns with business models that will be required in future…

    * Globalization to be the greatest single challenge that will be faced by HR professionals over the next century.

    *Outsource outsource outsource……operational work.

    Malvina Ashok

  4. Karen Lewis
    Posted December 15, 2008 at 4:54 pm | Permalink

    Phil,

    So refreshing to have someone talk about what is *really* happening in the industry. I wonder how much Barack Obama will impact offshore strategies in light of the accelerated downturn? I suspect he may have other overriding concerns in the coming months to help businesses, and delay introducing preventative measures – what is your view?

    Karen

  5. Posted December 15, 2008 at 5:03 pm | Permalink

    Hi Karen,

    Thanks for the kind words. I expect Barack to incent US firms to create US jobs, largely through tax breaks, than penalize them for offshoring. We need our businesses to be competitive and embrace global delivery – both in the US and internationally.

    PF

  6. Posted December 16, 2008 at 11:36 am | Permalink

    I agree with some of your observations. However, let me present the entire recommendation set and then see if you need anything more:

    a. Consolidation: A lot more captives who have been in the market would reach a deal price targeted by cash rich outsourcers. However, I am still a votary of Captives so I lean towards more of the joint investment captives. After all, if these were efficient and good sources of Cash for a sale you can do better in a multi-step sale so some will definitely hang on to a part of their investment in the captive for a “better tomorrow”

    b. People Sensitive Processes may not be Offshored: I see a lot of positive noise for Obama and he is likely to use the “long winter” till mid 2010 to bring in the tax benefits for the mid market companies looking for cost savings. A couple of HRO deals have already gone back and this may set a precedent ( It happened after the Halifax – Bank of Scotlad merger as well ) for some more to take preventive proclamations to avoid outsourcing of visible departments.

    c. IT Budgets will ensure that the downturn leads to more applications and RIM outsourcing as possible ( No servers, but no IT departments onsite please – it’s too expensive)

    d. Financial Services space seems to have left the discussion table on Outsourcing topics, but this is likely to remain a mirage for Outsourcing baiters as Financial Services Companies still have stable outsourcing models ( Captive, third party, challenger, Virtual Captives) No additional business is likely to go back from already outsourced projects, processes or departments

    e. Axon deal will set a precedent for further “upcountry” and “upsizing” moves but only for pioneers like HCL and maybe Infosys

    f. Vendor Map – IBM and Accenture will continue to do well with existing business but vanilla outsourcing is likely to remain the flavour for most companies and thus there will unlikely be any significant evolution in the vendor map this year with outsourcers continuing focus on keeping it private and uninviting transformation or other “experiments”, Ys that would enable pure scale plays. So will platforms. However, new platforms are unlikely to make any headway and the IT BPO combinations would stay with players with an established product and no need to price it to 90%

    g. (And unfortunately the toughest one) Sales and Marketing budgets of Outsourcing vendors are unlikely to see many dollars in 2009. Thus, overall buyers would have to depend on what they already know from the public space to make their decisions. This will thus continue to have repercussions on the no. of deals that are seen as successful in execution.

    h. I am afraid I can’t see how retail and logistics will convert their plans for cost savings from Offshore this year unless they are already planned and ready with the processes and the platforms that will move.

    i. Entertainment outsourcing is likely to come out strong with maybe even a ten-fold increase ( on the current small base) within the year.

    j. Process standardisation drives at Fortune 100 companies are likely to stay away from the limelight and unavailable for vendor participation.

    Best Regards
    Amit

  7. Posted December 16, 2008 at 10:02 pm | Permalink

    Phil,

    There are different views on offshoring. Sheer survival is forcing some CEOs (especially for SMEs) to reduce costs and hence consider offshoring. Building stronger capability in product/service offerings today – which can satisfy the pent up demand of the market when it comes back, is also a key factor – a balanced in-house/offshoring strategy is being considered in this scenario. Then there are companies for which offshoring is just a No-no based on past experience, local and political factors.

    There are skilled people available locally at wages far below normal, this is going to be a significant competitor to offshoring. If anything, the current environment will drive more rationalization into the offshoring process from business case right through to governance.

    Uttiya

  8. Posted December 20, 2008 at 8:26 am | Permalink

    Hello Phil,

    Please consider TEAM International’s early predictions on IT Offshore Outsourcing in 2009 based on company experience and publications by Information Week, Info-Tech, Wall Street Technology. You can find a few more Industry Reports on the dedicated page of TEAM International’s web-site.

    Regards,

    Oksana

    Links:
    http://teaminternational.com/knowledge_center/industry_reports.html
    http://teaminternational.com/knowledge_center_outsourcing_predictions_2009….

  9. Posted December 20, 2008 at 8:26 am | Permalink

    Thanks Phil

    Please see my list of ’09 predictions on my blog.

    http://pragmaticoutsourcing.com/2008/12/17/08-the-year-of-predictions

  10. Posted December 20, 2008 at 8:26 am | Permalink

    In today’s environment, where companies are going bust, money is king. and guess what guys, anything that saves money is going to work. If anything offshoring will increase, as opposed to the huge set of people onsite which will decrease – its happening already, see whats happening in Infy/ Wipro/ HCL

    Political aims are all very well, but companies have to survive first, they can only give employment if they survive. Remember there
    was a hue and cry over some Middle East investments a few yrs back into a US port (dont remember which one), whereas in 2009, we have major investments in the top financial global firms from Middle East/ Far East/ APAC and not a squeak.And would you say Goldman/ Citi/ BankAm have more influence or the US port ?

    Surely this tells us that (1) this is being allowed to happen notwithstanding anything else (2) the investors now in are there because they believe in global models, and they now control a lot more than before.

    Roopesh Kumar

  11. Posted December 20, 2008 at 8:26 am | Permalink

    Hi,

    I guess you have covered it well. Clearly, survival of the fittest..

    Looking ahead & beyond 3-6 months, the focus will also move from arbitrage to gradually more innovative & deeper business impact outsourcing solutions…

    Some customer segments ask for more specific domain capability….

    Potential interest for recent trends in services – such as growth in SaaS models, shared risk models in outsourcing arrangements, one to many, etc. will grow…

    Regards,

    Manish Mehta

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