It's time for people to stop panicking about next year.
On January 5th it's business as usual, companies will be selling and delivering their services, looking for new avenues that will provide them with competitive bite, operational excellence and new ways of surviving in a tough business environment. We are part of that.
Yes, some of us will get laid off – several people I know already have, but we'll find new jobs, or new career opportunities – we always do. We may get a little poorer, but so will everyone else and the cost of living will get cheaper.
End of the day, we function in a world where we have much better technology and communications than we had 6 years' ago, much more mature global delivery models, and a truly global marketplace in which we operate. The future opportunity for our careers and our businesses has never had so much potential in the long-term, once we get over these short-term hurdles and adjust to a more challenging business environment. Challenges and change breed new opportunities – and the world won't stop while we try to embrace them.
We have exciting new technologies being developed and a fledgling new industry for developing alternative energy sources. And we have a new President arriving with fresh ideas and a fresh energy… in just 3 weeks.
It's time to shake off the gloom. 2009 here we come.
Our super-charged discussionon using more relevant terminology to describe global services delivery took on another twist yesterday, when the WSJ published yet another pieceabout how the outsourcing market is "taking a hit", citing TPI’s large-deal data for 3Q08. This follows on from another recent articlefrom the same journalist, who appears determined to announce the demise of "outsourcing" to the world.
My colleague Dana Stiffler lends her weight to the argument:
"The number of $25M+ deals signed
in that quarter was the lowest in six years, a disturbing factoid indeed. If you stick to the old-school definitions of outsourcing, it’s easy to understand why headlines like these are so prevalent these days. They’re alarming, and we’re drawn to them. But the demise of large, traditional outsourcing contracts is a trend that’s been underway for years. Stories like the Journal’s – and broad-brush analyst research on outsourcing for that matter — makes coverage of these markets suspect, in good times and in bad. Are we all even talking about the same thing?
"Well, no. The headline refers to a contract size and type that is in decline. And other points in the piece were spot-on: less project spending, more delays in big-ticket decisions. But the article does not mention that this has been counterbalanced by sustained interest in expanding IT support relationships. Broader resource pressures, particularly around ERP, continue to force spending in the mid-market. I guess there’s not much of a headline in the fact that the third-party business and IT services market continues to grow, albeit more slowly, or that global delivery of services is now a structural requirement in companies’ global operations, and that there’s no escaping it. Problem is, none of this fits tidily under a traditional “outsourcing” heading. It’s time for the “O” word to go."
Well said Dana. The "O" terminology is clearly misunderstood in many circles. As Dana points out, "global delivery of services is now a structural requirement". The politically-charged issues surrounding the offshoring of US-jobs is clouding the real issue regarding what businesses need to do to be effective competitively on a global level. Businesses need to take advantage of global talent and resources to be competitive, and should not be penalized in this vein. The challenge for the incoming Obama administration is to create incentives for US businesses to deploy US staff, and not penalize a global services strategy. That means the US needs to be more competitive within a global context – something Detroit's automakers might need to focus on if they want to find a way out of their current predicament.
Update: Peter Allen clarifies TPI data:
Dana and Phil … seeing as how that article formed a conclusion based on data published almost three months ago, and covering one Quarter in the year, one might have hoped for a bit more journalistic thoroughness.
Yes, Q3's contract awards were the softest in quite some time. Dramatically soft.
But, Q4 picked up quite nicely. Like most Q4's tend to do. In fact, while the numbers aren't completely tallied, I am estimating that 2008's full-year record of TCV awarded will surpass that of 2007. (To wit: while Q3 yielded only around $14B in TCV, the month of October alone surpassed $15B!)
Many of us have tried for some time to differentiate between "true outsourcing" (mine: defined services, delivered at defined prices, at defined levels of service quality) and "effort-based contracting" or similar forms of wage-arbitrage staff augmentation. Alas, the broader market is still confused between these two.
I think that 2009 will see continued expansion in the use of "true outsourcing" while the appetite for arbitrage-driven staffing models will suffer. This latter slice of the market is what gave rise to much of the India-based provider community.
Some will have the wherewithal to taste the lemonade, while many others might just find themselves sucking on the lemons of a rapidly changing market.
Much more fascinating than trying to predict what, on earth, is going to happen in global sourcing in 2009, is trying to make some sense of 2008's non-stop chain of events. However, emerging from the rubble has been the maturing of the BPO industry, as several global service providers have striven to consolidate their market positions, anticipating further growth in BPO services in 2009. The premise being that buyers are quickly becoming more accepting of radical change to their global business models that not only drives down operating costs, but also enhances their competitive position.
How has BPO emerged as a vehicle to achieve these goals?
BPO matured as buyers took on a bottom-up approach to adoption. For the first time, we have started to see BPO engagements being adopted in the right way.
Rather than companies hurling their existing mess over the fence to a service provider (or politely dubbed "a transfer-transform strategy"), we've finally started seeing companies focus initially on transitioning the less-complex administrative processes, that can be supported by offshore/nearshore delivery and underpinned by tried-and-tested applications. HRO's comeback has typified how this should work, after 7 years of trying to be too clever, with most recent buyers making their initial forays into a global HRO engagement based on a global payroll delivery model, augmented with an HR systems implementation and supported by regional employee contact centers. This enables incremental HR processes, such as compensation, talent management and workforce management, to be integrated into the payroll hub, within a global model. F&A BPO services have already proven to be workable where buyers adopt the cash-cycle administration processes as an initial step, where offshore arbitrage is immediately available, and technology-enabled workflows can be plugged into the engagement. We are also beginning to see similar strategies with new procurement initiatives where firms are moving administrative support offshore, such as minor negotiations, supplier scorecard prep, market intel and data gathering, before taking on higher value work.
The emergence of the Indian-headquartered providers as competitive global BPO options. The last year has borne witness to a host of global Indian-headquartered service providers continuing to move aggressively into the BPO industry. With the exception of Genpact, all the other Indian-headquartered providers in the BPO industry had previously developed considerable presence in global IT services, namely Cognizant, HCL, Infosys, Wipro, Satyam and TCS. They clearly view BPO as a natural extension to application services, that gives them deeper, more intimate client relationships, additional revenue opportunities, a differentiated solution and a much stronger client "lock-in" opportunity. Moreover, if they fail to develop a BPO story, they run the risk of slipping behind the competition. In fact, several firms entered into ITO engagements this year, where the future promise of expanding into BPO with that supplier proved to be compelling differentiator in the down-selection process. Their general approach has been to start with less-complex engagements where they build client trust and confidence through proving their worth and capability, as opposed to winning these "big bang bake-offs" with their illustrious US-headquartered competitors.
The emergence of workable governance models has been a key ingredient. The major impediments to the success of past BPO engagements have been both the inexperience and resistance of buyers to develop a workable governance structure, in addition to the reactive nature of many suppliers to deliver services only to the letter of the contract. In many cases, companies have failed to restructure governance roles and responsibilities effectively, often creating a negative competitive dynamic with the service provider, and a resistance to change. Simply put, there is no defined curriculum for effective BPO governance; clients need to grasp control over their engagement and work pro-actively with their service partner – and vice-versa. The move towards a bottom-up approach to BPO is helping buyers experience managing their transactional work effectively in a global delivery environment, as opposed to finding fault with their provider providing higher-value services from the offset.
Companies are looking to decrease IT and operations budgets, in addition to expensive business transformation projects. BPO offers a business transformational opportunity for firms, with the investment underpinned by cost-arbitrage and moving onto a global operating model. Moreover, many firms have implemented a new technology platform alongside a BPO initiative, with the incremental cost being absorbed over the course of the agreement. This new-look wave of BPO engagements, with the focus of deploying operational processes and technology as part of the initial scope, is going to provide real opportunities for companies in 2009, looking to find new levels of optimization at a global level.
I've been so inundated with spammed e-cards this year, I'm putting out a generic "Happy Holidays" post that you can pretend I put together especially for you 🙂
In all seriousness, it's been a lot of fun interacting with so many of you this year – let's do more of it in 2009.
You may recall the discussion we had earlier this year regarding whether it is time to stop using the term "Outsourcing". The general consensus among many of you (including myself) was that we are stuck with the phrase and we shouldn't go out our way to dress-up global sourcing with other, more relevant, terminology:
"However you want to spin it, your staff will view it as outsourcing, and the more you try and disguise the taboo term, the more suspicious your staff will be that you are simply trying to ship them out for lower-cost labor"
With the dramatic changes in our corporate climate and political attitudes in recent months, I believe it's now time to change our well-worn phrase. The core issues being:
1) Poor comprehension of global sourcing. Too many people associate "outsourcing" with greedy corporate leaders only interested in slashing costs, with little regard for employee livelihood. They have pre-conceived notions that organizations have forgotten about their people, and only care about the bottom-line. I can assure anyone that is not the case with the majority of companies with whom I speak with daily.
In fact, the prime reason why many firms haven't ventured into wider-reaching global services delivery models, is because they care about their people too much and worry about the turmoil a global transition would have on staff morale and retention of key talent.
2) Guilt by association. The current recession is fuelling political passions regarding job protection. I have had a couple of occasions recently where I have been drawn into hard discussions regarding what I do. I have to explain that most my clients are going to "outsource" whether I like it or not, and my job is to help them approach it correctly, and not simplyjump at the lowest cost solution. The simple fact that I am associated with "outsourcing" paints me in a poor light with some idealists, which, quite frankly irks me. I see myself as a realist, helping real businesses deal with the hard realities of surviving in todays challenging business environment. I know many of you who visit here regularly feel the same way (and 20,000 of you do), whether you are a consultant, practitioner, analyst or service provider.
3) Many companies need to make hard decisions or risk going under. As we discussed last week, 2009 is asurvival of the fittestacross almost all industries. Enhancing global market penetration while reducing operating costs has never been as critical in this long corporate winter. Putting tough decisions on hold is no longer an option and simply shaving a few percentage points off pockets of cost is unlikely to have a dramatic impact on many struggling businesses. Global sourcing clearly provides a vehicle to help make radical changes, but is only part of the answer. The other ingredients are the ability to make smart business decisions and deliver great leadership through your managerial ranks. This simply isn't "outsourcing", it's smart global business strategy.
4) Skills at affordable prices. The talent available across the globe to help drive competitiveness is so much more developed than it was 5 years' ago. The incredible advancement of the Internet has completely changed the game in bringing international markets close together. Global sourcing is so much more than using a low-cost call center rep these days – and too many people are not aware of this yet. It's about supporting complex ERP systems, analyzing accounts, clinical data, logistics, investment research, engineering etc. In so many cases, it's easier to find many of these skills engaging with global sourcing partners than hire them yourself. That's not "outsourcing", it's smart business strategy. We work in business of global service delivery, which is tied directly to global business strategy. Hence, we are "global business services" executives.
Love to hear your prolific thoughts on this topic (as per usual). PF
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.
I just read a piece in the Wall St Journal, which has me wondering whether many people actually think companies buy outsourcing like servers, or software licenses. Companies outsource to reduce costs and access skills and technologies they need to be more competitive. It's also a tough, long-term decision for many firms to take, and it's no wonder we're experiencing a slow quarter in deal activity as companies wait to see how the economy is going to shake out. With IT budgets being reduced and pressure to take out more administrative costs, firms have little other choice than to explore outsourcing opportunities. What the article fails to mention is the huge amount of evaluation activity we're seeing in the market right now. How about asking TPI et al. how many consultants they have on the bench? My sense is not many…
It's time for people to stop panicking about next year. 
However, emerging from the rubble has been the maturing of the BPO industry, as several global service providers have striven to consolidate their market positions, anticipating further growth in BPO services in 2009. The premise being that buyers are quickly becoming more accepting of radical change to their global business models that not only drives down operating costs, but also 
