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…
We've had many animated discussions in the past regarding the trials and tribulations of the HRO market. To cut to the chase, HRO has struggled to live up to expectations as clients struggled with poorly integrated service delivery, overly complex operational issues, the lack of common HR standards and common HR technology platforms. This often resulted in negligible cost savings and fractured service provider relationships. Not to mention some significant write-downs by some of the providers who took on overly complex engagements.
However, new research I've been carrying out in recent weeks
indicates significant recent shifts in this space, which have contributed to a renewed growth in new engagements. The multi-process HRO market grew by 24% in 2007 in new contract signings, and is ontrack to maintain a double-digit growth-rate, when taking into account the number of new contracts signed during the first half of 2008:
Reasons for this renewed growth?
Recent HRO engagements are largely much less complex than the earlier generation of contracts, primarily centered on payroll, contact ctr, workforce admin services
The HRO mid-market has not only arrived, it is now driving the market, spearheaded by a very strong performance by ADP
More efficient deployment of HR technology platforms bundled with HR processes (a dire industry need Naomi Bloom discusses here). 84% of current HRO engagements involved a new system being implemented either concurrently with or just prior to the HRO engagement. In a similar vein, 92% of the current HRO engagements involve the HRO service provider maintaining and supporting the HRO systems
The increased maturity of global outsourcing providers and the rapid deployment of offshore/nearshore HR delivery models
The leading HR services specialists sticking to their knitting
A significant move has come from the India-headquartered global services providers, with Wipro now commanding a 6% market share of the enterprise market with some significant new client engagements, and Infosys and TCS also gaining footholds in the market. IBM has also made some significant traction in the enteprise space.
The industry has gone back-to-basics to provide HRO services that are centered primarily on payroll and workforce admin solutions that are tried and tested, and less complex. The key has been for the service providers to deliver HR services that are based on common standards, common technology platforms, using lower-cost offshore and nearshore resources. Moreover, the entry of aggressive lower-cost competition from the global outsourcing providers has served to create a much more enticing value proposition for today’s buyer.
With a challenging 2009 ahead for enterprises, the availability of maturing HRO models are surely going to be enticing offerings for firms seeing to reduce overhead and move onto a global operating HR services model.
Not many people are better-placed to debate the thorny issues of outsourcing and government policy than my old friend Glenn Davidson. Glenn is synonyous in the public sector world with issues relating to human resources strategy and broader outsourcing strategy, having been one of the founding members behind Equaterra's public sector practice that was launched in 2005 and now a major part of their business. Among several commercial roles, Glenn previously served as one of Accenture's key executives behind their early forays HRO post their e-Peopleserve acquisition, and prior to that as a chief of staff and communications director to a Virginia governor, as the Commonwealth’s chief federal lobbyist and as a legislative director to an Ohio congressman.
With so much heated discussion regarding the policies President-Elect Obama is going to deliver regarding the USA's future stance on offshore outsourcing and public sector contracting (which we touched upon here), I asked Glenn to put together some of his thoughts on where this will lead… over to you Mr D:
"Unlike the 2004 Presidential campaign, where outsourcing was a prominent political issue, two wars, an ongoing financial crisis and broad support for health care reform took center stage in the 2008 race. Now that the election is over, outsourcing may yet become a topic for policy deliberations in a new Obama Administration. But I believe the discussion topic will be more narrowly framed than most people predict.
"President-Elect’s biggest outsourcing-related concern is likely to be offshore outsourcing. He referred to this specific type of outsourcing while seeking the Democratic presidential nomination, saying that as president, he "will stop giving tax breaks to companies that ship jobs overseas, and I will start giving them to companies that create good jobs right here in America."
"As an active participant in the global business community, I know that, in order to be competitive, the quality and prices of our products and services must match or better others that originate elsewhere. So, there may, indeed, be good reason to look abroad for resources, skills and lower-cost labor we cannot find here. The issue of controversy doesn’t surround the intrinsic business value of off-shore outsourcing – or, for that matter, the value of off-shoring to a firm’s “captive” overseas operations – but rather the tax treatment of offshore revenues.
"A Washington Post editorial focused on this point in August. “It's not clear that the tax code — as opposed to other factors, such as lower wages or technological advances — plays a big role in companies' decisions to move jobs elsewhere or that leveling the playing field between foreign and domestic income, as Mr. Obama proposes, would do much to save or return jobs to the United States.”
"But the converse of that argument is also true and President-Elect Obama makes a very strong point – if there are intrinsic business reasons to outsource offshore, then why would companies need a tax incentive? Leveling the playing field would probably have little or no effect on jobs – but ending the tax disparity would, in the long run, promote tax fairness. Perhaps we should embrace a tax code that neither encourages nor discourages the use of off-shore labor and makes the case, instead, for off-shoring purely on its business merits?
"Another aspect of outsourcing likely to draw Obama’s attention is use of independent contractors and staff augmentation firms in government. Prior to the election, the Washington Post’s Joe Davidson asked both presidential candidates the following question: "Federal labor leaders complain that outside contractors perform jobs that should be done by government employees. Do you favor any suspension of contracting out activities? Do you favor legislation that would prohibit the IRS from using appropriated funds to hire private tax collectors?"
"The response from the President-Elect’s campaign was interesting. “Sen. Obama is concerned by the rising number of government contractors that are often unaccountable and frequently less efficient than government workers. As president, Obama will restore effective oversight of the government-contracting process and reduce our Nation's increasing dependence on private contractors in sensitive or inherently governmental functions. Obama will eliminate the Bush administration's ideological bias towards outsourcing of government services and abandon initiatives, like the inefficient use of private bill collectors to collect federal taxes that are a demonstrated waste of taxpayer money.”
"So, is it the provision of technology and services by firms outside of government that concerns the President Elect? Or is it the increasing use of independent contractors and staff augmentation firms that’s the issue? I maintain it’s the latter.
"The government has long relied on outside parties – be they commercial enterprises or not-for-profit organizations – to develop systems for the defense of our country, build roads, operate our telecommunications networks, and manage our research laboratories, among other activities. I don’t believe that will change. Government and industry have worked collaboratively to their mutual benefit for generations.
"However, as for government’s reliance on independent contractors and staff augmentation firms, I believe that will to change. While the concept – of accessing specialized skills and talent on a limited, temporary basis – makes complete sense, the practice has been abused. More and more agencies have turned to this practice in order to circumvent difficult and cumbersome employment policies and practices, including recruiting, diversity, compensation and unionization requirements. What these agencies fail to realize is that, in so doing, the people they secure may not understand the organizations’ mission let alone how to implement it effectively. They also have no commitment to the agency and no institutional memory. The result, as one might suspect, may be a less than optimum workforce.
"Earlier this decade, the outsourcing industry was just taking root and many feared that any government steps to reign in some aspects of it would stunt its growth and prevent the industry from blossoming. Well, the outsourcing industry is clearly flourishing today. And I’m confident it can withstand the increased scrutiny.
"That said, I applaud President-Elect Obama for avoiding the incendiary political rhetoric, that some in the media are apt to employ, and looking at the issue from the perspective of economic benefits and workforce excellence."
Glenn Davidson is the Managing Director of EquaTerra’s Public Sector Practice
And if a sourcing advisor was elected President…
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 
To cut to the chase, HRO has struggled to live up to expectations as clients struggled with poorly integrated service delivery, overly complex operational issues, the lack of common HR standards and common HR technology platforms. This often resulted in negligible cost savings and fractured service provider relationships. Not to mention some significant 
