David Sheinfeld is one of the best-kept-secrets in the outsourcing world… he operates behind the scenes on many major deals doing the real down-and-dirty technical and contractual stuff to make these things work. The man is a walking encyclopedia – need I say more? The following is a snapshot of his thoughts on how dramatically the industry is changing….
- It used to be that Outsourcing was reserved for the name companies in the marketplace. That was not long ago. After Y2K and the spending spree, corporate America embarked upon it, and it became clear that many functions could be handled more efficiently and less costly by having someone else do the work. We saw contracts orth billions of dollars being awarded to the likes of IBM and EDS. Then along came companies such as Accenture, ACS, CSC and HP. Together, these six companies became known as the Big Six of outsourcing companies. That was just a couple of years ago. How things have changed in such a short time period. The latest reports showing dollar volume, growth and the number of outsourcers seem to question whether the term Big Six is even applicable today. Over the past few years many other companies, especially those companies located outside the U.S. and whose Global delivery model has gained traction, have diluted the market share of the Big Six. A recent report by TPI states that over $100 billion dollars worth of contracts were coming due in 2006 and 2007, with almost 50% of those dollars concentrated in two companies, IBM and EDS. Now there is a whole group of new companies coming up the chain to provide the same services and solutions as do the larger companies. Outsourcing has become a commodity and is experiencing the same pressures that many other commodities go through as they become mature market players.
- As in any commodity business, the more choices you have, the more pressure the commodity has in the market. The Outsourcing Industry is in a sea of change. The client is more knowledgeable today than in the late 90’s when those original contracts were signed. The client appears not as concerned with outsourcing and has a more expanded view of what the outsourcer should provide – and it’s not just cost savings. The client is requesting more in terms of value-added services and solutions as part of the outsourcing transaction. The outcome of all of this is more choices, more competition and therefore greater price pressures on those providing the services.
- Depending upon which offering the outsourcer is pursuing will determine what services are offered and the price for those services. For example, call center services and the pricing for those services may be more generic and the processes more uniform than Finance and Accounting or Human Resource processes. Each specific area requires a particular expertise not only on the human side but also the technology side. Some areas have the potential for large transition and start-up costs which are likely to cause greater margin pressures during the life of the agreement. Now with clients breaking up the contract scope to more than one provider, there is less margin dollars and less opportunity to make up losses if they should occur in the beginning of the contract. Furthermore, with smaller contracts in place there is a greater emphasis by the outsourcing company to try to hold back transition and start-up costs as the ability to recoup those costs becomes that much more difficult. The new contracts may also require more services or other value added solutions that increases not only the requirements under the terms of the agreement but also increases the risk to perform. Thus, the provider needs to be prepared to give more for less!!
David Sheinfeld is currently a strategic partner with Becton Schantz, Inc., one of the largest application service providers in the country. He is a Principal of Horizon Business Advisors LLC, a strategy, management and merchant banking firm. He is also the founder and CEO of MKJ Advisors, LLC, a merchant bank and advisory firm specializing in strategic planning and mergers and acquisitions. Previous to this David was a founder, Chairman and CEO of Fresh America, Corp., one of the largest distributors and manufacturers of value-added food products in North America. David can be reached at [email protected]