What's New January 2010


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CORE's monthly newsletter - What's New focuses on the new year. With this in mind we have compiled articles that have an outlook on the economic conditions and the outsourcing industry for the year ahead.

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What's New January 2010

  1. 1. What’s New – January 2010 In The News Areas Where Outsourcing Will Grow in the Next Five Years Managed Print Services Outsourcing gets a boost Service Outsourcing Industry Robust in China Multi-country nearshore arrangement for Nokia Late into services outsourcing, Wal-Mart signs on 3 providers Articles in Depth Economic Conditions Snapshot: McKinsey Global survey results 10 Outsourcing Trends to Watch in 2010: Various Research firms Impact of 2009 and the Predictions for 2010: Providers weigh in Switching to Outcome-Based Approaches in Outsourcing Events & Reports Webinar on Location Assessment of global services outsourcing Europe Overtaking North America as Top Outsourcing Region: TPI Procurement Outsourcing Market Full of Hype: Ovum
  2. 2. In The News Areas Where Outsourcing Will Grow in the Next Five Years Experts predict several areas of the industry will experience significant growth over the next five years. Reverse outsourcing, verticalization, emerging markets, business analytics, healthcare, transportation, and ERP are some of the areas that will enjoy increased attention. Industry trends Reverse outsourcing’s growth has two facets. First, the economic downturn and the weakening U.S. dollar have inspired some companies to move their outsourced work back to the domestic arena. "Today there is a preference to relocate customer-centric functions back to the United States," says Andre Pery of Kofax. This trend will "accelerate" over the next five years. Because the economics now work, Pery predicts American suppliers "will invest more aggressively in offering capabilities domestically." He says the foreign exchange rate combined with the availability of large levels of highly-skilled American labor bring U.S. labor rates "more in line with offshore rates." For example, suppliers can set up shop in rural areas where labor costs are lower. Pery also points out the federal government may provide incentives to keep work at home. That possibility has inspired outsourcing firms outside the United States to open facilities there. "We envision the stimulus package will provide incentives for companies to utilize outsourcing suppliers that have facilities in the United States, including offshore firms that have set up U.S. offices to take advantage of the anticipated incentives," he says. Infosys's acquisition of Atlanta, Georgia-based BPO provider McCamish in November is one example. The second major industry trend is verticalization, made possible by the strength of the second- tier suppliers. Buyers of the future want specific, vertically oriented skills and domain knowledge. For example, Cerner and Capgemini are two tier-two specialty suppliers in the healthcare space. They will grow their business at a rate higher than some of the more established firms. In the past, Pery points out buyers "were somewhat reluctant to outsource their mission-critical applications. But that dynamic is changing dramatically because of the economic volatility in the downturn." Now companies need to shed costs, so economic pressures are driving them "to outsource their mission-critical vertical applications to firms that have demonstrated experience in that area." In the financial services market- Paul Diegelman, Practice Manager, Finance and Accounting Optimization for BancTec, predicts commercial banks will be exiting the check and payment processing outsourcing business and strong, non-bank technology and processing providers will
  3. 3. take up the slack and dominate the market. "The economics of check and payment processing requires high capital expenditures and onshore head count yet generates lower returns. That's why commercial banks no longer favour it," he says. He predicts the continued outsourcing of this process, which large corporations rely on for their working capital, will accelerate. Don Schulman, General Manager, Finance and Administration for IBM, believes the industry, which is already consolidating, "will continue to do so in an accelerated manner." He predicts buyers "will start to circle around a few of the big players who have the funding to make the necessary investments and drive to best practice standards." Ravi Kapoor, Practice Manager, Supply Chain Management for Wipro, says another area of growth for suppliers is helping buyers "embark on green initiatives throughout the enterprise." Specifically, suppliers can advise buyers on how to make their data centers more cost-effective by going green. Offshore Karthik H., Research Director, Everest Research Institute, says outsourcing companies will need a delivery network of multiple locations to compete in the marketplace of the future. That means suppliers "that have a global presence and access to skills in different markets will have a greater chance to succeed," he says. Karthik says it's common for Fortune 500 companies to have as many as 20 centers across the world. "They want to access the unique skills and benefits of each location," he explains. While he believes India will continue to retain its dominance as a global sourcing location, he feels companies "will consciously think about diversifying into other multiple locations." Access to skills is the most important driver, in his experience. But diversifying risk is also important; the terror attacks in Mumbai last year "got people to think about diversifying some types of work." A third driver is time zones. Suppliers have to do some types of work, like IT infrastructure maintenance, in real time. As for locations, Karthik predicts the Philippines will record "similar or faster growth than India" because of its large talent pool and cultural affinity with the United States. Many of the other countries in Asia "will record moderate growth," he notes. He says China is growing -- focusing on its domestic market and Japan. "Africa will be of increasing interest" in the next five years, the Everest executive predicts. The reason: the new Seacom cable has slashed telecom costs up to 80 percent. For the first time, African locations will offer a "robust infrastructure." In Eastern Europe, Karthik believes growth will shift from tier-one to tier-two cities. Similarly, he predicts the smaller locations in Latin America "will become increasingly significant." Emerging markets Everyone agreed emerging markets will be an area of growth - whether it's an emerging market for new outsourcing buyers, new process domains, new capabilities such as analytics, or new geographies for service-delivery locations. IBM's Schulman says the supplier's "emerging
  4. 4. markets business is explosive." He says IBM has made "significant investments" in China, Eastern Europe, India, Latin America, and other parts of Asia. He says the growth in those emerging markets started with mature corporations trying to enter into commerce in those locales. But today and five years out, he says the real growth will reside in home-grown companies in those markets. "The financial crisis has caused a lot of fast- growing emerging markets to look inward and create a domestic capability instead of an export market," the IBM executive explains. These companies "recognize they need more sophisticated capabilities, so they are coming to us and asking for help." Five years ago, he says offshoring "was all about labor arbitrage. But now there's clearly no labor arbitrage in emerging markets. Today the industry is about more enterprise business outcomes, process optimization, and cloud computing. We are able to provide value-added services to these local companies that support their strategic evolution," Schulman continues. Analytics and business intelligence Rahul Singh, Head, BFS & INS BPO for Tata Consultancy Services, predicts within two years "all customers will seek to outsource research and analytics, thus leveraging business insights from their service providers to further support their business strategies." Schulman says outsourcing buyers are looking for suppliers to provide "analysis and insight that would transform their businesses." He says buyers want analytics embedded into their outsourced process "to improve productivity and drive business outcomes." Suppliers have made significant investments in these capabilities and can provide the insight needed to drive better business decisions, which buyers "would never have achieved on their own." For example, IBM's analytics services helped one client quickly identify that many of its customers were beginning to slow pay and rapidly forecast the impact on working capital. "This was something they previously could not have seen on their own," Schulman explains. TCS assisted a U.S. retailer in eliminating more than $10 million in inventory turnover costs by applying analytics to its supply chain services. Mohammed Haque, Vice President & Head of Enterprise Solutions Service practice at Genpact, predicts business intelligence, which runs on top of the ERP platform, "will grow big in the next five years." He says that's where "most of our customers are investing heavily right now." Haque says outsourcing buyers want to have a "single master view of data. This knowledge improves their decision-making or increases revenue." In the past, customers have grown through acquisitions, leaving different divisions on different platforms. The result: "They don't have one single view of the truth," he says. In the future, buyers want a unified view of their suppliers and their customers. So data management will be different. He gives a procurement example. Many companies have no idea what they spend with their top three suppliers. "Without a spend analysis, they are not able to negotiate bigger discounts. They are in a much better position if we can deliver this knowledge," he explains.
  5. 5. Healthcare To help the American economy recover, this year the U.S. Congress passed the American Recovery and Reinvestment Act (ARRA), which included legislation that impacts the healthcare industry. And then there's the current Congressional action on healthcare reform. "You don't have to go much further than the front page of the paper to understand the government is going to be taking a significantly greater role in healthcare," says Will Saunders, COO, Government Healthcare Solutions Group for ACS. These changes in the industry will increase outsourcing because healthcare providers and payers cannot implement these changes on their own and certainly not at the pace they want. There will be "a progressive shift toward healthcare outsourcing over the next five years," says Dr. Harry Greenspun, Chief Medical Officer, Dell Perot Systems. Transportation David Cummins, Vice President of Business Development for ACS's Transportation Solutions Group, points out the "widening gap between transportation demand resources and the 'supply' of infrastructure has reached crisis proportions across the globe." The sagging economies, escalating fuel prices, and the public's resistance to raising fuel taxes are exacerbating the situation. At the same time, environmental concerns are "front and center." Over the next five years, he predicts the public sector will continue to turn to outsourcing to minimize capital expenditures for increasing infrastructure capacity like new roads, transit systems, and ports. "Governments will increasingly look to the private sector to increase the efficiency of their existing capacity through technology and low labor costs," he says. He estimates the global outsourced transportation market will grow by five to seven percent annually over the next five years. Cummins predicts a key change in transportation outsourcing will occur over the next five years. He says buyers are "looking for outsourcing partners to share in the risk and reward of taking over significant public projects." An example of this type of arrangement is already underway in Lima, Peru, where ACS is financing the up-front investment for a smart-card-based transit solution; in return, the supplier will share in revenue from the operations. ERP Haque says the current economic environment "is a major catalyst for outsourcing ERP." Another driver is "sub-optimized performance" of past ERP installations. The third driver is the wave of mergers the economic recession created. For example, one company's ERP may have SAP but the other may have Oracle. Once merged, these companies have to select one platform and then implement it company-wide. Lessons from the Outsourcing Journal:  Reverse outsourcing will grow as the foreign exchange rate and the high unemployment rate in the United States make outsourcing to suppliers on American soil financially attractive.
  6. 6.  The economy is causing companies to consider outsourcing some of their core competencies. But they want suppliers that have proven expertise in their domain. Verticalization will become more important in outsourcing.  Global delivery services, or offshoring, will increase over the next five years because companies will want their outsourcers to be able to move work to multiple locations to access skills and diversify risk.  Changes in U.S. law will stimulate growth in healthcare outsourcing. Payers and providers are realizing they lack the personnel, expertise, or facilities to manage applications that have to be on continuously and that have to comply with newly strengthened privacy and security regulations.  Analytics services is an area of growth for outsourcing because buyers want their suppliers to provide insights from their data so they can make better decisions and improve their bottom lines.  There will be market growth opportunities in the transportation outsourcing area because governments want to invest in technologies that make the transportation system work better. Over the next five years they will increasingly look to suppliers that are willing to enter into risk-sharing arrangements to help finance transportation initiatives. Source: Outsourcing Journal, January 2010 Back to Top Managed Print Services Outsourcing gets a boost With companies around the world outsourcing their printing services, the printer and copier industry seems to have found a rare bright spot. Big companies are increasingly hiring Xerox, Hewlett-Packard and others to provide "managed print services," a variety of outsourcing in which the vendor takes control of the customer's production of office documents, typically owning the machines, advising on how to use them, and taking a per-page charge. The office-machine makers promise to cut document costs by as much as 30 percent by reducing the numbers of printers and copiers installed on office floors and desktops, replacing them with multifunction printer-copier-scanner-fax machines. World-wide managed print services will amount to $20.3 billion this year, up 47 percent from last year, according to Photizo Group, a Lexington, market researcher. The segment looks increasingly attractive to manufacturers in a year when shipments of printers, copiers and multifunction devices are down 7 percent to $49.8 billion. Makers of copiers and printers are rapidly changing their strategies to boost their services business. "It's going crazy. We're drinking from a fire hose. It is now the driving force in the overall market," says James Joyce, Xerox's head of managed printer services.
  7. 7. One of the biggest rollouts began a year ago when Procter & Gamble hired Xerox to manage its print services around the world to monitor usage and reduce waste. Xerox is replacing some 45,000 devices, mostly HP desktop printers, with about 10,000 shared multifunction devices that are mostly made by Xerox. Caroline Basyn, P&G's manager for the project, says that by using the new machines, which print on both sides of a sheet, P&G has reduced use by three million sheets of paper, and it believes it has achieved "40% energy use reduction." Xerox and H-P are the leaders in the industry, and each sees managed print as a way to outflank rivals such as Canon and Ricoh Bruce Dahlgren who heads HP's managed print services unit, which was unveiled earlier this fall as a new division in H-P's printer group, says the company's history of selling services for computer departments gives it expertise with the networked devices used in managed printing. To expand its offerings in the multifunction arena, HP recently signed an agreement to sell Canon's devices in addition to its own. It is also developing a suite of software products designed to manage document flow within industries such as insurance and loan-processing. Xerox's Joyce says "this is a different playing field, and the contracts are huge." The contracts also discourage customers from frequent competitive bidding. Xerox just signed a multi-million dollar managed-print services contract with Ingersoll-Rand Co. that lasts nine years. Ken Weilerstein, who follows the market for Gartner Inc., says that "it's not net new business. The customer is reducing what they're spending, but the vendor is hoping to cannibalize someone else's business." Xerox, among the first to spot the managed-print opportunity, is also adding to its services revenues through its pact to buy Affiliated Computer Services Inc. for $6.4 billion. The purchase gives Xerox an opportunity to manage printing for ACS customers, who typically hire ACS for other tasks, such as managing information technology operations or processing invoices. H-P has moved to take advantage of relationships in its huge computer-services organization, which manages many data centers for big enterprises. Acquiring a big services organization was a key element in Canon's agreement last month to buy Dutch printer maker Oce NV for $1.09 billion. Ricoh expanded its services operations last year when it bought Ikon Office Solutions for $1.62 billion. Photizo says its data show that HP surpassed Xerox last year to become the largest managed print services firm with a 35 percent share to Xerox's 29 percent. Ricoh is third with a 14 percent share followed by Canon with 5 percent and Lexmark International with 4 percent. Gartner says that it hasn't completed analyzing its data but it believes Xerox is still the leader in the field. Source: Wall Street Journal, December 2009 Back to Top
  8. 8. Outsourcing Industry Robust in China The global economic meltdown impacted many of the clients of BT Frontline, which provides outsourcing services for the IT systems of docks and logistics companies. But its General Manager, Lawrence Low, is still satisfied with the company's performance amid the financial crisis and confident about its future China's service outsourcing industry, mostly about software outsourcing, bounced back in the second half of the year from a hard time of three months caused by shrinking demand from the global market, according to Yu Hengzhuang, vice president of Dalian Software Park. "We have gained access to high-end market and recently entered the Middle East market, which more than offset the impact of the global downturn," Low said. "Our business not only survived, it grew and thrived," Low said with a smile, keeping the exact figures as business secret. Rapidly developing Industry The software outsourcing park in Dalian, the industrial hub in China, attracted 63 new clients in 2009, bringing the overall number of businesses in the park to more than 400, and the park's total sales are expected to top 20 billion yuan, up 32.9 percent year on year. The sales of Dalian's software outsourcing business grew from 200 million yuan (29.3 million U.S. dollars) to more than 30 billion yuan in the past 10 years. A total of 700 companies are in the industry, including 300 joint ventures and more than 40 Fortune 500 companies. In the first ten months, the industry's sales in Dalian grew by 33 percent to 33.7 billion yuan and its export grew by 34 percent to 1.1 billion U.S. dollars. While Dalian has become a world famous hub of software outsourcing after Thomas Friedman compared it with Bangalore in India, another less known industrial hub with equally fast pace in east China's Jiangsu Province, is taking shape. The contract value of Jiangsu's software outsourcing industry reached 3.28 billion U.S. dollars in the first 10 months of the year, a growth of 174 percent. The province has 2,470 companies in the industry, with 290,000 employees, according to statistics from the provincial department of commerce. The provincial capital Nanjing's software outsourcing industry had a contract value of 2.1 billion U.S. dollars in the first 11 months of the year, growing by 239 percent.
  9. 9. "The income of China's software industry, which software outsourcing takes a major part, has been growing by 38 percent annually and its revenue is expected to top 1 trillion yuan in 2010," said Hu Kunshan, vice chairman of China Software Industry Association. China's software industry earned 757.3 billion yuan in 2008, and the figure is expected to reach 900 billion yuan in 2009. Employment numbers More than 60,000 people are working in the software outsourcing industry in Dalian. China's outsourcing industry recruited 690,000 new employees, 460,000 of whom were college graduates, in the first 11 months of 2009, according to statistics released on a national conference on commerce. China's Ministry of Human Resources and Social Security expects the outsourcing industry to create 1.2 million new jobs in five years, including 1 million jobs for college graduates. At the end of Sept. 2009, 1.42 million people were working in 8,060 outsourcing companies in China, said Qian Fangli, deputy head of the foreign investment department of the Ministry of Commerce. The software outsourcing companies in China have enough programmers but lack mature project managers and decision makers, who are on the top of the talent pyramid, said Yu Hengzhuang, vice president of Dalian Software Park. The gap in talent pool limited the size of such companies to less than 300 people, which is a human resource threshold to carry out core projects with high added value. "That's why Chinese companies are now the lowest ring of the world software outsourcing chain," Yu added. Chengdu: The Panda City of Mainland China Chengdu, the capital city of Tian Fu Zhi Guo has a significant historical background. The city originated as an indispensable part of ancient Chinese culture, the Bronze culture. Chengdu also stands out for its Chu embroideries and brocades and is a flagship of the handicraft industry in China. Chengdu is ranked 33rd in the Global Services-Tholons Top 50 Emerging Outsourcing Cities - 2009 study. Chengdu Tianfu Software Park, established in 2005 gives a boost to the country's IT and service outsourcing Industry. The park offers services like recruitment, staff dispatching, company incorporation, BOT/outsourcing solutions and training services to the companies who want to set up their center in the park. This step has contributed towards the enhancement of IT services like software development and infrastructure services in Chengdu. As per Tholons , an investment advisory firm, in 2008, the revenue from Chengdu's software industry rose by 37.7% year on year reaching RMB 42.7 billion, which accounts for 5.6% of the nation's total. Currently, more than 450 certified software enterprises operate in Chengdu, including 102 enterprises with integration qualifications for a total of 100,000 practitioners.
  10. 10. Chengdu is the most cost effective destination as compared to other provinces in China. The average wage in Chengdu's IT and IT-related industries is less than half of that in Beijing and Shanghai. The average entry level salary in ITO is US$400 – 500 and that for a BPO is US$250 – 350. In 2009, Chengdu had many new notable companies setting up data centers: Accenture (February), DHL (April), Alibaba.com (July) and Wipro (November).Other service providers and captives in the city include Siemens, Lafarge, IBM, Amazon, Microsoft, Symantec, Ubisoft, Gameloft and GGL. ―Unlike Dalian, which due to its language capabilities is an excellent fit for Japanese/Korean clients, Chengdu is more versatile,‖ says Saugata Sengupta, Analyst, Tholons Advisory Firm. With its mix of not only language versatility (Japanese, English and Chinese) but also higher education institutes, Chengdu offers a strong value proposition to both American and European clients. Although significant progress has been made by the central and the various provincial governments to pass IP related laws, the implementation still remains quite weak The investment climate in China has improved over the years and Chengdu in particular offers one of the largest SEZs in the world which has proved a significant attraction to investors. The government has lately offered attractive incentive packages for organizations looking to establish in Chengdu (IT/BPO space) – making it a viable and attractive option. Sengupta of Tholons concludes, ―China in their evolution to a services economy from a primarily manufacturing driven economy, has to seriously consider collaboration and not competition among its provinces. The environment of pure competition created by these provinces is detrimental to the development of China’s outsourcing potential and has turned out to be unhealthy for the 'China Outsourcing Brand'. Without a strong hold of the brand the country is offering, it cannot move into one direction and lacks a single value proposition in the client’s eyes.‖ Source: TMC news, Global Services Media, January 2010 Back to Top Multi-country nearshore arrangement for Nokia Nokia has outsourced desktop management and help desk functions in 76 countries to Indian outsourcer HCL Technologies HCL announced that the handset maker has signed a five year contract. The outsourcer has set up a new office in Helsinki, Finland, to deliver nearshore services to Nokia, in addition to delivering services from centers in Poland, China, the U.S. and India. The contract includes multilingual helpdesk services in 13 languages, global account management, workstation packaging, creation and maintenance, workstation security management, and onsite support services delivered by partners, HCL said.
  11. 11. Indian outsourcers have typically not been able to get desktop management contracts because they do not have a global presence, and rely on local partners at each location, said Siddharth Pai, a partner at outsourcing consultancy firm TPI in Houston. A key factor in this relationship will be how much control HCL can exercise over its local partners, Pai said. The Helsinki center will have 100 staff and will help HCL offer nearshore delivery of services to its other customers in the Nordic and Baltic regions, the company said. Some Indian outsourcers like HCL have set up facilities in the U.S. and Europe to offer customers a mix of services delivered from locations close to the customer, and from offshore locations like India. Source: Offshoring Times, January 2010 Back to Top Three IT Firms Bag $600 Million Wal-Mart Deal Wal-Mart has selected three IT vendors in India Infosys Technologies, Cognizant Technology Solutions and UST Global for multi-year contracts worth over $600 million. The amount is roughly equivalent to the value of goods — textiles, handicrafts and other products — that the world's largest retailer sources from India every year. This development is expected to boost the IT outsourcing landscape in India, given that Walmart typically prefers to develop its retail applications in-house. Walmart gradually started buying packaged retail applications from leading software vendors such as Oracle, HP and SAP only towards the end of 2007. It had, however, given Infosys and Cognizant pilot projects about five months ago. ―What is more important is that these three vendors have now got a ticket to be in the club of Walmart's list of preferred vendors which will help them in growing this account in the long- run,‖ said a source close to the development. According to the contract, Infosys and Cognizant will be responsible for application development and support, while UST Global will be responsible for specific testing of these applications. Asked about the deal, Infosys and Cognizant declined to comment. ―As a policy, we do not comment on speculation in the marketplace,‖ spokespeople from both companies said. A UST Global spokesperson in India said the company does not comment on any client specific information as ―we have non-disclosure agreements with most of our clients‖. UST Global is part of the $6 billion US-based business conglomerate Comcraft Group, with a major presence in India.
  12. 12. Walmart's media relations director John Simley replying to an e-mailed query said: ―We have a large and growing business and productive relationship with many Indian companies. We do not comment on speculations about the nature of any business relationship.‖ Walmart, the largest private employer and grocery retailer in the US with revenues of $404 billion (2009), selected the vendors after a competitive bidding process in which most Indian IT services companies participated, except TCS, India’s largest IT services firm. TCS failed to qualify for the bid because it has an exclusive partnership with Target, another American retailer, who is into direct competition with Walmart. Among the bidding companies, Walmart shortlisted six contenders of which three were finalised based on their level of competency in various processes. Unlike other retailers, Walmart does not want to open its own captive centre in India, even though the company has established a huge sourcing office in Bangalore sometime back. Some of the world’s leading retailers like Tesco, Target and Supervalu have their own software development centres in India. Tesco’s Hindustan Service Centre which went live in May 2004, employs close to 3,000 people. In 2006, Supervalu which is the third-largest grocery retail chain in the US, also set up a captive development centre in India for new applications development, technical operations and testing of applications. Source: Business Standard, December 2009 Back to Top Articles in Depth Economic Conditions Snapshot, December 2009: McKinsey Global Survey results For the first time this year, a majority of executives expect consumer demand for their goods to rise in the near term. Respondents offer relatively positive views of the economy and say they can now make longer-term strategic plans. However, many expect investment decisions over the next two years to be affected by heightened exchange rate volatility. As a tumultuous year draws to a close, executives are moderately hopeful about their nations’ economies and their companies’ prospects, according to a survey in the field of 1,600 executives representing the full range of industries, regions, and tenures during the second week of December 2009. Just over half of executives continue to say economic conditions are now better than they were in September 2008, and for the first time this year a majority expect customer demand for their companies’ products or services to rise in the near term. In addition, notably more are seeking—and getting—external funding than have done so in more than a year. And after reporting a striking shift in favor of short-term planning early in 2009, executives say their companies are once again able to plan for the medium and long term—but also that they remain
  13. 13. wary, assessing more options and checking progress more frequently than they did before the crisis. This survey also included some questions on currency volatility and reserve currencies. Nearly a third say that exchange rates today have an ―extremely‖ or ―very significant‖ effect on their profits. Further, executives expect greater future volatility in exchange rates as well as significant changes to global exchange rate arrangements in the coming years—only 18 percent expect that the US dollar will still be the dominant reserve currency in 2025.2 Moderated hope The share of executives with largely positive views on their nations’ economies has continued to grow slightly over the past six weeks: just over half say economic conditions are better than they were in September 2008 and nearly 70 percent say they expect economic conditions to be better still at the end of the first half of 2010 (Exhibit 1). Further, for the first time, more than half of all executives (57 percent) expect their countries’ 2009 GDP to increase—a jump of 8 percentage points in six weeks, perhaps reflecting a view that the end of the year is now close enough for them to express some certainty. Respondents are also moderately hopeful about their companies’ prospects. For the first time this year, more than half (54 percent) expect customer demand to increase in the near term, compared with 39 percent in April 2009.3 However, the share expecting a profit increase—46 percent—is almost identical to those who expressed a similar view six weeks ago, indicating that executives see continued pressure on pricing and costs. Indeed, cost control remains the single most frequently chosen action that companies plan to take over the next 12 months to cope with changing economic conditions, with 65 percent saying they expect to undertake it. Expectations for the workforce remain stable, and just over a quarter of respondents expect an increase in the near term. Expectations for additional decreases are likeliest among respondents at companies headquartered in the eurozone (39 percent) and those in manufacturing (34 percent).
  14. 14. More robust funding and planning For the first time in more than a year, the share of respondents saying their companies have sought external funds has changed significantly, increasing to 41 percent in this survey, from 32 percent in October—a figure consistent with findings over the past year. Further, more were able to get the funds they sought (Exhibit 2). These findings may indicate a rising, and apparently well-founded, hope among executives that funds will be available to them. Most companies have made several changes to their strategic-planning and budgeting processes since September 2008. Taken together, these findings indicate greater comfort with planning for the future than we saw a few months ago, but also ongoing wariness. In general, companies are making strategic plans for lengthier periods now than they were in March 2009: then 13 percent were planning no more than one quarter ahead, a figure that has now dropped to 6 percent, while the share of companies planning for three years or more in advance is now at 38 percent, a rise from 24 percent. (Nonetheless, 20 percent of respondents say their budgets cover shorter time frames than they did before the crisis, while 15 percent say the same of their strategic plans.) In both processes, the most common change is assessing progress more frequently (Exhibit 3). Some companies are also building more flexibility into their planning, with 12 percent of those who report that their planning time frames have changed saying their strategic plans now cover more time frames than they did before the crisis, and a third saying their budgets now take several scenarios into account.
  15. 15. In regard to who’s part of the planning, a slim majority of respondents (52 percent) say the share of executives involved in planning hasn’t changed since September 2008; just over a third report a change. In each case, roughly equal shares say half or more of their companies’ senior executives are involved in bringing issues to the attention of strategic planners (36 percent) and in making decisions (40 percent). Volatile currencies Turning to the questions on currency and exchange rates, one of the most striking findings is that only 18 percent of respondents expect the US dollar to be the dominant reserve currency in 2025; even among respondents in North America the figure rises only to 31 percent (Exhibit 4). The frontrunner, selected by just over a quarter of all respondents, is the dollar and the euro jointly, followed by a basket of currencies such as the International Monetary Fund’s Special Drawing Rights (SDRs). The survey indicates that both the level of exchange rates and exchange rate volatility have a large and growing effect on company profits and investment decision making. Thirty percent, for example, report that exchange rates have an ―extremely‖ or ―very significant‖ effect on company profits (Exhibit 5), while 21 percent of respondents report that exchange rate uncertainty has reduced their planned investment over the next two years (most report no effect). Further, 44 percent of respondents believe that the effect of exchange rates on their companies has increased over the past five years and 43 percent expect exchange rate volatility to increase over the next two years; only 21 percent expect exchange rate volatility to decline. Taken together, these results suggest that exchange rates have—and are likely to continue to have—a material effect on company competitiveness.
  16. 16. There is significant variation in these results. A full 50 percent of manufacturing companies, which are more likely to be in trade-exposed activities, report an ―extremely‖ or ―very significant‖ effect on profits. And while only 17 percent of North American companies reported an ―extremely‖ or ―very significant‖ impact on profits from exchange rates, 42 percent of respondents in developing markets report such a relationship. Source: McKinsey, December 2009 Back to Top
  17. 17. 10 Outsourcing Trends to Watch in 2010: By various research firms Both suppliers and outsourcing customers could be in for a bumpy ride in the “new normal” of post- recession 2010. It was a long year of intense ups and downs in the IT outsourcing industry. Consolidation among vendors and interest in remote infrastructure management increased, while overall outsourcing demand and IT services pricing decreased. The market for IT outsourcing is expected to rebound a bit in 2010, say industry watchers. For instance, more than 75 percent of the service providers polled by EquaTerra in the third quarter of this year reported continued growth in their deal pipeline, which was up 10 percent from the previous quarter and 34 percent from the same period last year. But don't expect too robust a revival. Outsourcing consultancy Everest predicts that although suppliers will see a resurgence in demand for IT and business process outsourcing services in 2009, growth rates are unlikely to return to pre-2008 levels. Both suppliers and outsourcing customers could be in for a bumpy ride in 2010. Here are 10 trends to look out for as the IT services industry finds its feet in the "new normal" of the post- recession. 1. Transformers 2. Sure, outsourcing customers will still want vendors to transform IT in 2010. But revolutionizing IT service delivery is expensive and difficult. "Optimization is the new transformation," says Mark Toon, CEO of outsourcing consultancy EquaTerra. "Ultimately, organizations will still want to 'transform' how they deliver back office services, but they typically will want to move in pragmatic, incremental steps and focus on achieving best in class, standardized and optimized delivery models." 2. If at First You Don't Succeed, Renegotiate. There has been an increase in the number of contracts being renegotiated and rebid during the past 12 months, according to outsourcing consultancy Compass America, and that will continue in 2010. "While many organizations remain keen to avoid the costs of new capital and migrating to new suppliers," says Tom Schramm, EquaTerra's managing director of finance and accounting, "investment is being made in ensuring existing suppliers and internal processes are delivering optimum value." 3. Multi-Sourcing Malaise. Multi-sourcing seems ideal in theory-work with best-in-class IT service providers and keep costs in check, thanks to the competition. In reality, it's been difficult at best and disastrous at worst for many customers.
  18. 18. "Organizations are reassessing their approach to selective sourcing and multi-sourcing, and realizing that they need to have a certain level of maturity in terms of processes, governance and vendor management in order to make the multi-vendor model work," says Bob Mathers, senior consultant with Compass America. "Organizations that have pursued multi-sourcing without investing in management capabilities are finding themselves longing for the problems they used to have with their one and only vendor." Watch for reevaluation and restructuring of these relationships next year. 4. Captive No More? While certain companies will continue to set up fully-owned IT delivery centers abroad, look for more captive center divestitures in the new year and a "marginally lower" number of new captives being set up, predicts Everest. 5. The Urge to Merge. The number of top-tier service providers shrunk this year, creating both challenges and opportunities for other vendors in 2010. "Consolidation at firms, including HP, EDS, Dell, Perot, ACS and Xerox, may represent an opportunity for their competitors," says Charles Arnold, managing director of EquaTerra's IT advisory for the Americas. "From acquiring former staff of top-tier providers to snapping up now empty chairs at the bidding table, competitive providers may be able to leverage this chance to grow capability and market share in 2010." The M&A party is likely to continue after we've rung in the new year. "This consolidation will most likely involve tier two and tier three providers, as they struggle to compete with the breadth and depth that their tier one competitors can offer," says David Rutchik, partner with outsourcing consultancy Pace Harmon. "We would not be surprised to see a non-offshore provider acquiring an offshore-based provider." Everest predicts that most consolidation in 2010 will focus on acquisitions of "adjacent and complementary capabilities across functions, verticals and geographies," as opposed to mergers solely to increase scale. 6. Offshoring to...America? The greenback has had a gruelling year. That could play out in some interesting ways. "With the continued decline in value of the dollar and sluggish employment, I would expect to see more U.S.-based sourcing solutions evaluated by private and public sector clients across the globe," says Peter Iannone, EquaTerra's executive director for the Americas. 7. The Mega-Death of Mega-Deals. Increased near-term cost pressures will drive a continued decline in mega-deals in 2010, Everest predicts. Customers will continue to eschew the billion- plus deals for more flexible approaches to outsourcing, says Lee Ayling, manager of Equaterra's U.K.-based IT advisory. "In 2010, we will see many contracts focused on core processes with shorter, less expensive transition periods and reduced return on investment timescales," says Brad Everett, executive director of EquaTerra's human resource practice. 8. The Public Interest. All signs point to increased outsourcing in local and state government. "Budgets are tight, but demands for new technologies are strong," explains Glenn Davidson, head of EquaTerra's public sector practice. "The winners in the competition will be offering innovative financing and strong risk insurance."
  19. 19. However, he predicts decreased outsourcing in D.C. "The federal government, with its ability to print money and this administration's push for insourcing, is likely to continue its investment in internal solutions," Davidson says. 9. The (Slow) Return of the Discretionary Spend. Providers of application development, and maintenance and consulting services will develop innovative contract and pricing structures to win customers as the market rebounds next year, according to Everest. Both types of deals took a hit as buyers put discretionary spending on hold. But such projects will make a gradual recovery in 2010, predicts Everest, noting that "the pace of this change will be dictated entirely by the improvement in the global business environment." 10. Semi-Sourcing. Cloud computing and software-as-a-service-which EquaTerra's Stan Lepeak calls "semi-outsourcing alternatives"-will make waves in the IT services industry in the year ahead. The IT outsourcing market has reached a major tipping point, according to Forrester Research analysts, and a focus on outcomes means that traditional deals will continue to decrease during the next several years as new utility and cloud service offerings proliferate. "This will be a large focus as companies try to figure out how this will work," agrees Dave Brown, head of EquaTerra's financial architecture practice. "Those that develop a sustainable commercial offering will hit the headlines early and often." Modularity will be the name of the game. Suppliers are poised to offer buyers more and more plug-and-play services coupled with pay-as-you-go pricing. "We have observed a continuing move toward a more scalable and virtual infrastructure for many services...and more aggressive efforts to take advantage of sourcing's ability to scale up or down with the size of the business," says Melany Williams, partner and managing director of service provider consultancy TPI Momentum. But it will be small and midsize companies leading the charge in this space in 2010, says Everest, while large enterprises wait for more of the technical and business challenges to be resolved before adopting these new delivery models. A word on pricing Outsourcing prices dropped overall in 2009, and industry watchers expect the downward trend to continue next year. It's not just the global economic slowdown that's sending IT service prices south, it is also the increased use of offshoring, pricing pressure from customers, and a reduction in vendors' services. "We see more companies willing to outsource offshore to take advantage of global labor arbitrage opportunities than in the past," says Ben Trowbridge, CEO of outsourcing advisor Alsbridge, which owns price benchmarking firm ProBenchmark. "One of the issues we see is that lower prices can also be driven by disaggregated services." For example, lower desktop support prices might be due to a vendor delivering remote infrastructure management support. But they might just as well be the result of a reduced scope of services that leaves the client with a lower level of service or possibly having to retain other costs--which negates or reduces the customer's potential savings, Trowbridge adds.
  20. 20. Mark Toon, CEO of outsourcing consultancy EquaTerra, says that buyers of outsourcing services have remained focused on cost cutting and avoiding future investment throughout 2009. Toon believes that IT services customers will continue to focus on price through 2010. But, that "price pressure will be tempered by the need to ensure overall deal parameters do not jeopardize success," adds Stan Lepeak, EquaTerra's head of global research. Should the economy show strong signs of life in the new year, some say it won't be a buyers' market at all. "Much depends on whether or not the apparent signs of economic recovery prove true," says Chris Kalnik, partner and managing director of financial analysis for sourcing advisor TPI. "If the economy strengthens, TPI believes that the service providers will attempt to recoup some of the price concessions that they have made over the past year." RIM's Effect on IT Outsourcing Prices On the infrastructure side of the IT outsourcing house, market share will continue to shift toward remote delivery of services where possible, and offshore players will drive desktop and network service prices to new lows. As remote infrastructure providers improve their capabilities, more infrastructure outsourcing customers may look offshore for savings, while the broader global economic slowdown will continue the pressure to reduce costs in the Americas, says Trowbridge. "These two trends are working together to drive overall market prices lower," he adds. But those cost savings may be short lived and slight. What's more, RIM isn't for everyone. "Maturity in this market has led organizations to identify the processes that are better delivered locally and to select service providers [based] on flexibility and customer intimacy as well as price," notes Paul Cornelisse, managing director of EquaTerra’s information technology advisory. Meanwhile, Cost of Onshore Outsourcing to Rise in 2010 Ovum Analyst Peter Ryan said: "Onshoring centers in North America, Europe and Australia/New Zealand, are already seeing vacancy rates that are substantially higher than usual" The cost of outsourcing for end-users within the UK looks set to increase as country begins to come out of recession, research has suggested. The operating costs associated with areas such as real estate and staff are set to increase over the next 12 months, according to the report from technology consultants Ovum. This will lead to more staff employed on a permanent in-house contract and could force outsourcers who want to retain the best staff to up pay, in a move which will pass increases on to clients. Significant onshore opportunities for outsources will still exist however, according to the report, particularly in areas that have been hit by the recession. Source: Computer World, IT World, Sourcing Focus, December 2009 Back to Top
  21. 21. Switching to Outcome-Based Approaches in Outsourcing Among the various changes that will impact outsourcing over the next five years, Don Schulman, General Manager of Finance and Administration at IBM, says the first will be a focus on outcomes-based pricing models. "Focusing on clients' end-to-end processes, the discussion moves to outcomes pretty fast when considering the advantage of an outsourcer doing a client's work. Over the next five years, this will become a critical differentiator in the way clients and providers work together," he predicts. Les Mara, who leads Enterprises Services BPO in EMEA for HP, agrees. "In the next few years, I think that outcome-based approaches will accentuate polarization in the market between niche providers and mainstream providers." He predicts polarization because he believes that buyers can only undertake these sorts of arrangements with larger, more mature, asset-rich providers. Mohammed Haque, Vice President and Head of Enterprise Solutions Service practice at Genpact, says that 90-95 percent of outsourcing arrangements today are still based on time and materials or a fixed fee with only five percent tied to outcome-based pricing. But he predicts that, within the next five years, 40-50 percent of the contracts will be outcome based. Though some companies achieved truly outstanding results from outcome-based approaches since 2001, to date they are few and far between. The problems with this sort of outsourcing arrangement lie in the following aspects:  It requires that the buyer have a deep level of trust in the provider -- not only its capabilities but also its continual demonstration of partnering.  Measurable outcomes require a level of visibility that one or both parties may not be willing to provide.  It may not be possible to measure a provider's exact impact on an outcome.  The service provider must assume a great deal of risk since it does not have influence over all aspects that impact its ability to achieve the outcome. And the amount of risk increases significantly when the outcome is higher up on the value chain. Historically, companies found it difficult to achieve success in these kinds of outsourcing arrangements. What will enable the predicted shift to nearly half of the deals being outcome based in the next five years? Enablers and catalysts for the change to outcome-based outsourcing The industry experts we interviewed discussed three catalysts that will enable buyers and service providers to widely adopt an outcome-based approach over the next few years. 1. Outsourcing is now evolving beyond savings through labor arbitrage and focusing on new and different ways to create value, including synergies between functions as key drivers of value.
  22. 22. Scott Mingee, Senior Vice President, Business Development for ACS's commercial healthcare, finance and insurance lines of business, explains a key enabler of changing from unit-cost or transactional-cost approaches to outcome-based approaches. "The approach is changing especially in areas where the buyer has a significant fixed cost. This is forcing them to get more creative because so much of their current spend isn't in people, so there's not as much savings available through labor arbitrage. The value in an outcome-based approach depends on transformation through new innovations that a provider needs to bring to a specific function." Rahul Singh, Head of BFS & INS BPO at Tata Consultancy Services (TCS), concurs and adds that customers will no longer want to pay huge fees for "consulting" and "improving" processes; instead, the providers will find it imperative to transform the processes to drive better output and outcome. 2. Providers are now investing and innovating around invigorating their capabilities in and around new value creation. Mingee says leading providers are now building the capability for a value-creation approach and that more buyers will adopt it as the basis of their arrangement over the next three to six years. Part of this involves building platforms and simplifying processes. But it also requires that providers gain deeper knowledge of a customer's industry. Haque at Genpact believes the industry knowledge and domain knowledge will play an important role in achieving business outcomes. Haque also says the capability for delivering more value outcomes necessitates "providers not being tied to a linear group. It will call for a change in the mix of the consulting and technical teams. Providers will have to change their complete game in order to help their customers change the outcomes," Haque states. Mara agrees. "In outcome-based approaches, the outsourcer doesn't just provide services; it also takes responsibility for achieving a different business outcome on a different level of balance-sheet performance." He cites an example of migrating all of a buyer's finance and accounting functions within the engagement's pricing based largely on the provider's performance in improving the buyer's working capital position. Mara says that, although this is an extreme example of an outcome approach by today's level of risk adoption, he believes "buyers and providers should definitely be encouraged to focus on outcome objectives. I don't believe buyers should just hand over a process in the sense of 'do this for us' anymore. Outsourcing can deliver higher value, and outsourced processes need to achieve outcomes that align with the business agenda of the client." However, he adds that outsourcing arrangements focusing on outcome objectives can only be successful when both parties are collaborative and take a partnering approach. 3. The partnering approach to outsourcing relationships will deepen.
  23. 23. "Outcome-based sourcing creates a greater level of dependency on the service provider," warns Mara. Haque explains it is "extremely important that the buyer understand the level of risk the provider must take to help the customer achieve the desired business outcome. This will only work if it is a complete partnership type of relationship and if there is strong governance and relationship management. And senior leaders on both sides must work together." V.K. Raman, Head of Domain BPO Services at TCS, says that over the next two to three years the delivery of transactional services will become a hygiene factor and providers will increasingly contribute to the customer's business strategy. Outcome-based sourcing will involve a longer contract life. And it will definitely involve a deeper level of collaboration as well as the buyer's willingness for the provider to take on a trusted advisor role. Advice for establishing an outcome-based model There are some fundamental things that are different in structuring an outcome-based approach to outsourcing. 1. Transparency and trust. Mingee at ACS says the parties must first get to a deeper level of trust, which will also increase the level of transparency, collaboration, and information-sharing than currently exist in most outsourcing arrangements in today's environment. "By transparency, I'm talking about sharing with your partner all of your information, not just some basic volumes and general costs. It's both companies talking about their business, where their problems lie, the opportunities, and developing a shared vision of a new outcome." Historically, companies that achieved outstanding success with outcome-based approaches undertook those initiatives only after they achieved a certain level of mutual trust. However, because of the three enablers described above, and because of the impact of the mid-sized market being more willing to immediately adopt outcome-based approaches as a means of quickly gaining competitive advantage, the outsourcing industry will likely see more companies establishing outcome-based sourcing initiatives sooner in the time frame of a relationship. 2. Data requirements. Haque advises buyers must understand that a switch to outcome- based pricing "cannot happen overnight. For many, it is a journey that can take at least 18-24 months to implement." The buyer must have complete data, and the provider must do an assessment of the buyer's landscape. 3. Measuring outcomes. Mara warns that companies in an outcome-based arrangement must critically review service level agreements (SLAs) to ensure they align with the desired strategic business outcome. "Most companies today are accustomed to SLAs that measure activity and workflow steps, and those outputs are not necessarily aligned to business outcomes."
  24. 24. 4. 4. Risk-reward models. For the greatest and riskiest outcomes, buyers and providers may need to employ a shared risk-reward model. Besides demonstrating a willingness to "put skin in the game," this strategy incents the right behavior on both sides (including enforcing a commitment to change) that can influence the desired outcome. Impact on third-party advisory services In contrast to the current trend of buyers infrequently using third-party outsourcing consultants to help structure cost-based approaches in outsourcing, many buyers turn to expert third-party advisors for help with outcome-based sourcing arrangements. However, Mingee at ACS believes outsourcing consultancies will change as adoption of this type of outsourcing increases. "Third-party advisors' experience has largely been in unit-based sourcing," he explains. "I think they will need to evolve into areas of specialty, with outcome- based sourcing as a specialty, or perhaps outcome-based approaches within towers or industries as specialties. I am not sure exactly how it will evolve, but I believe this specialization and verticalization will become more and more important relative to the use of third-party advisors." Examples of structuring outcome-based services ACS recently developed an outcome-based offering in healthcare communications. Here's an overview of how the provider can originate this kind of an offering and how buyers will benefit by adopting such an approach.  Buyers' business situation: (1) Demand on healthcare payers to communicate more effectively with their members and with healthcare providers (such as hospitals and physicians). (2) Healthcare reform and legislation will create more competition for consumers, which will drive the creation of products and an added emphasis on creating consumer "stickiness" for health plans. (3) The continued cost escalation of healthcare in the U.S. economy is forcing health plans to look for new and different ways to create value, including ways to monetize their existing infrastructure and operational assets.  The impact of the provider's capabilities and industry knowledge. Because of ACS's expertise in the healthcare vertical, it recognized the following situations. (1) It could help health plans extract new value out of the health plans' printing and communications infrastructure. (2) It could also create value by reducing the insurance companies' biggest communications cost factor: postage. (3) It could create additional new value by integrating/converging the insurance companies' various customer service communication channels for explanations of benefits and remittance advice.  Risk-reward model. The offering uses a shared risk-reward model to align and incent both parties' behaviors in achieving the outcome. "A large part of our revenue only comes if we successfully extract new value by reducing their postage spend," reports Mingee. He says postage for a large national health plan may represent $70 million of a $100 million budget in overall print and mail operations. In the past, insurance companies moved to electronic communications but there was no incentive to control or shut down paper communications, so they ended up paying for both. The risk-reward model enables achieving the desired outcome.
  25. 25.  The provider's investments. ACS has invested in infrastructure enabling an ecosystem approach to communications, which would aggregate the communications of multiple health plans and multiple healthcare providers, thus creating new value by further significant cost reduction. Mingee says the provider's infrastructure investments plus its vertical expertise will cause the healthcare communications market to "work together in new and different ways to streamline processes and create new value by taking costs out of the system." BancTec also provides an outcome-based approach to document-centric processes. Paul Diegelman, BancTec's Practice Manager of Finance and Accounting Optimization, describes its "Inbound Services" offering as a "process-enriched structure for handling, processing, and decisioning all incoming business documents in a manner that achieves balanced outcomes of compliance, risk management, and client service in a long-term, jointly supportable business case." BancTec's approach leverages the synergies between document management and downstream business processes such as F&A, HR, healthcare membership management, loan servicing, and others. "The mailroom isn't just a place where mail is delivered -- it's the point of origin for many key business processes that affect a client's working capital, customer relations, and profitability," Diegelman says. This more comprehensive end-to-end approach, which is platform based rather than based on geographically dispersed labor, creates outcomes of reduced costs, reduced process friction, faster time to resolution, and reduced risk through improved compliance with policies and procedures. The BancTec exec says, "The market has already begun to realize that these sorts of opportunities exist, and adoption of this centralized, outcome-based approach for document management and the resulting downstream business processes will accelerate within the next few years, especially among the Fortune 1000." The vision Mara at HP comments that companies have found various sources of value through outsourcing over the past few years; but, with outcome-based approaches, outsourcing comes almost full circle to its original vision and value proposition. Mingee points out that providers demonstrate their commitment by making substantial investments in not only service delivery solutions, but industry knowledge and have acquired demonstrable experience in the field. Providers are not just building platforms or enabling infrastructure. Their knowledge and experience leverages the IT and delivery investments to make outcome-based sourcing successful. There is a saying that "life isn't about finding yourself, it's about creating yourself." Companies that leverage an outcome-based approach to outsourcing over the next few years will have a new competitive advantage from creating their own value in outsourcing.
  26. 26. Lessons:  Although some companies achieved outstanding results with outcome-based outsourcing since 2001, this approach historically saw low adoption because of its challenges regarding the required level of trust and visibility, measurement of outcome, and the service provider's ability to impact influences on the outcome.  The next five years will see a greater adoption of outcome-based approaches to outsourcing because of these catalysts and enablers: o The necessity to create new value beyond labor arbitrage and ensure the value aligns with the buyer's strategic business goals o Providers' investments in developing vertical solutions, platforms, and other enabling infrastructure, thus increasing their ability to impact outcomes o Deeper level of partnering in relationships, which will impact trust and collaboration and facilitate the provider's ability to influence outcomes  For the greatest and riskiest outcomes, buyers and providers may need to employ a shared risk-reward model. This incents the right behavior on both sides (including enforcing a commitment to change) that can influence the desired outcome. Source: Outsourcing Journal, January 2010 Back to Top The Impact of 2009 and the Predictions for 2010: Top Providers weigh in Experts share their sage assessments- Impact of 2009: ACS: The current downturn is deeper and broader than any since the Great Depression. It is forcing governments and enterprises around the world to re-think how they conduct their business. Enterprises that would never have considered outsourcing in the past are now re- examining their options beyond the usual suspects of IT and data centers. For example, HR functions such as finance and accounting are clear examples of corporate overhead they can outsource. Rebecca Scholl, Senior Vice President of Marketing and Communication Dell Perot Systems: Passage of the American Recovery and Reinvestment Act. The ARRA- funded incentives for physicians and hospitals to adopt electronic health records will increase the use of outsourcing as they implement mission-critical applications. Dr. Harry Greenspun, Chief Medical Officer, Dell Perot Systems Everest Research Institute: Merger and acquisition activity in the outsourcing supplier market accelerated, including increased combinations of hardware and services (Dell-Perot, Xerox-
  27. 27. ACS) plus consolidation plays in the contact center space. Eric Simonson, Principal HP: Going into 2009, the market expected a significant number of companies to sell their captives to service providers due to deteriorating economic conditions. However, few companies sold their captives because we believe companies are still failing to recognize their shared- service model's lack of sustainability due to scarce investment funds, lack of core focus, and limitations on their scalability. Les Mara, Head of BPO EMEA IBM: The economy triggered a number of events that impacted outsourcing. A broader group of buyers began to reconsider BPO as a viable option to reduce costs, achieve greater outcomes, and utilize flexible delivery models that can support them during market fluctuations. Buyers are seeking strategic partnerships that enable them to accelerate transformation. We've seen significant market interest, a stronger drive toward procurement sourcing/indirect spend, and an increased focus on enterprise business outcomes. Don Schulman, General Manager, Finance and Administration Pinstripe: The credit and banking crisis and the subsequent lack of access to capital. The resulting liquidity problems forced precipitous drops in business activity, but the silver living was that some progressive companies actually saw the downturn as the best time to implement strategic recruitment initiatives like HR and recruitment process outsourcing because of their scalability, flexibility, and usefulness in controlling costs. Sue Marks, CEO TCS: In 2009 executives chose not to make decisions because of the economic recession. There were significant drops in budgets, which impacted outsourcing volumes. Some processes like collections did see a surge, but companies put major outsourcing decisions on hold; clients managed volume surges through higher internal productivity. Abid Ali, VP and Global Head, BPO Services and Process Excellence Wipro: The economic woes and, in retrospect more than that, the indecision driven by uncertainty as to how deep it would be and how long it would persist. On the positive side, thanks to strong decisive measures, many enterprises exited the year with a higher degree of confidence. Lakshminarayana Lan, Chief Strategy Officer Predictions for 2010: ACS: The drive to maximize revenue and contain costs as the economy slowly recovers. Executives don't want to re-visit the expenditures they had 24 months ago and risk their company's future. They will relentlessly pursue improving their operation models. Outsourcing will play a role here, like embracing cloud computing or economically viable green technologies. Smart business leaders will emerge from the recession with a renewed focus on maintaining a healthy balance sheet so they don't have to relive the horrors of the past year. Rebecca Scholl, Senior Vice President of Marketing and Communication CompuCom: The most impactful outsourcing event in 2010 will be the amount of churn resulting from the changing landscape of service providers. Merger and acquisition activity,
  28. 28. niche providers exiting the business, tier-two providers moving up the value chain, crucial changes in capabilities, and a greater need for true partnering from providers will create new dynamics between providers and clients. Ed Anderson, Chief Strategy Officer Dell Perot Systems: Establishment of regulations around "meaningful use" in ARRA and regulations around privacy/security, which will drive organizations -- especially in the healthcare industry -- to outsource in order to meet very high standards. Dr. Harry Greenspun, Chief Medical Officer, Dell Perot Systems Everest Research Institute: The outsourcing industry's recovery will accelerate. The winners will become clearer and prompt further consolidation, particularly in the offshore ADM sector. Eric Simonson, Principal Genpact: Buyers will evaluate alternative methods, such as Software as a Service or cloud computing, for upgrading ERPs and other major applications. It took the emotional event of the economic downturn to force CIOs to look at drastically different models. However, these concepts may miss the hype period as many are still not ready for full deployment. Spot solutions will explode in 2010. Perry Santia, Senior Vice President, Business Development, Information & Technology HP: We believe the continued maturation and increased analytical capabilities available in BPO services will push more corporations with captive units to recognize the need for partnering with proven providers. Les Mara, Head of BPO EMEA IBM: Further expansion and growth in the outsourcing industry due to the combined impact of the economic climate and the maturation of the BPO industry. For outsourcing buyers, it's no longer just about cost and labor arbitrage, but about enterprise business outcomes, a demand for standardization, and greater connectivity with both their suppliers and their customers. Don Schulman, General Manager, Finance and Administration Infosys: Companies will continue to feel the recession's impact. Risk-transfer models, i.e., platform and outcome-based pricing, will continue to excite buyers. Offerings that enhance revenue or offer insights into the business will see a higher degree of acceptance. Outsourcing will continue to drive seismic shifts in procurement and will have the most impact on supply chain initiatives. Technology intervention in processes and vertical play will continue to see an upward trend in adoption. Ritesh Idnani, Vice President and Head, Global Sales and Marketing Kofax: The level of U.S. government incentives. There will be incentives for firms to provide nearshoring capabilities and increased activity in the United States for outsourcing services. That will impact the way the major outsourcing firms offshore will react and invest in the United States. It also will stimulate growth and investment by domestic firms to create BPO services in the United States. Andrew Pery, Chief Marketing Officer
  29. 29. Oracle: The economy will continue to put pressure on IT organizations, leading to more pressure to transform IT. Cloud computing is a hot topic on every CIO's mind. Mark Schwarz, Senior Vice President and Leader of the Oracle On Demand business Pinstripe: As the economy recovers, there will be increased employee turnover. Jobs will not necessarily come back where they were before, geographically or organizationally. There will be more supplier churn than normal. We will finally see a pent-up demand for infrastructure because of the lack of investment in 2008 and 2009. Sue Marks, CEO TCS: Buyers will be clear about their business strategies. This will result in a lot of pent-up internal demand; when growth is back and volumes pick up they will outsource to handle the additional demand. That is likely to have a positive impact on the outsourcing industry. Abid Ali, VP and Global Head, BPO Services and Process Excellence Wipro: We see a gradual improvement in economic conditions. Enterprises will continue to focus on cost transformation but will add business transformation to their agendas as well. Variability in cost, flexibility to adjust to the changing environment, and virtualization in operations will be the core focus. Lakshminarayana Lan, Chief Strategy Officer Source: Outsourcing Journal, January 2010 Back to Top Events & Reports Webinar-Location Assessment: Perception and Reality for Global Businesses Services Outsourcing is one of the fastest maturity curves modern industry has ever witnessed. Geographies play a most critical role in operational delivery and success of the services outsourcing initiative; hence location assessment is of paramount importance. Moreover, due to rapidly changing landscapes, it becomes extremely difficult for "perceptions" to keep pace with the perpetually-shifting "realities" of these fast-emerging and dynamic Centers of Excellence. Global Services & Tholons have tracked both the perceptions and realities of how location assessment has evolved for services outsourcing. Following the release of their fourth edition of Top 50 Emerging Outsourcing Destinations Study - they track this evolution with a webinar titled "Location Assessment: Perception and Reality for Global Businesses." Date: Friday, January 15, 2010 Time: 11:00 AM - 12:00 PM EST Visit- https://www1.gotomeeting.com/register/552636456
  30. 30. Europe Overtaking North America as Top Outsourcing Region: TPI Report TPI has released data which shows that through the first three quarters of 2009, Europe surpassed North America as the leading region in the world for outsourcing spending by Global 2000 companies and is on track to end the year as the highest-spending region for the first time. According to the TPI "Momentum Market Trends & Insights 3Q'09 Geography" Report, European Global 2000 companies outspent their North American counterparts by approximately $1.2 billion in average annual contract value (ACV) through the third quarter. North America, which led the world in outsourcing spending by G2000 companies in 2008 with $29.6 billion in ACV versus $28.7 billion for Europe, looks poised to miss that mark this year and lose its top spot. "Understanding the global outsourcing market requires up-to-date information on local and regional dynamics in every part of the world," said Melany Williams, Partner and Managing Director, TPI Momentum. "This Report offers on-the-ground detail and analysis by TPI experts and advisors to help service providers and others identify and pursue the most promising opportunities - wherever they might lie." For each of the six regions, the Report analyzes contract trends, delivery center activity and business and political developments that impact the sourcing industry. Twenty-nine individual country profiles provide more detailed information about the sourcing climate within key markets, including changes in size, opportunities for future growth and penetration rates of service providers. The Report also introduces a new research methodology, the TPI Outsourcing Viability Index, which compares the strengths and weaknesses of 115 countries on the key attributes that service providers look for when deciding where to establish a service delivery center, including Education & Workforce, Infrastructure & Technology and Political and Economic Stability. TPI designed the Index based on its experience evaluating service delivery locations for hundreds of outsourcing buyers. Among the notable results from the TPI Outsourcing Viability Index: North America and Europe dominate the rankings, with the United States and Canada at No.1 and 3, respectively, and six European countries making the top 10--the United Kingdom (2), Germany (4), the Netherlands (6), France (7), Switzerland (9) and Denmark (10). While other markets are growing slowly but steadily, India (13) and China (21) have experienced a rapid rise in spending among their G2000 companies, with China's market growth appearing to lag India's by about two years. Both countries were rated among the top 10 on the Sourcing Environment dimension. Brazil (24), the highest-ranked country in Latin America, also made the top 10 for Sourcing Environment. The Report found that Latin America is home to the fourth-highest market
  31. 31. opportunity among the regions with $3 billion in additional ACV potential. Source: TPI, December 2009 Procurement Outsourcing -- The Next Major BPO Growth Area?: More hype than fact per report by Ovum "The procurement outsourcing market has been described as being on the verge of major expansion a number of times in recent years, yet the promised boom has yet to happen," said Ed Thomas, analyst at Ovum and author of this report. "However, there remains a great deal of room for growth in the market and Ovum expects it to increase in size at a steady, if unspectacular, rate over the next five years." The procurement outsourcing market has a unique competitive landscape, said the research house, adding that it is dominated by four market-leading vendors: two outsourcing giants (IBM and Accenture) and two procurement specialists (ICG Commerce and Ariba). The other vendors operating in the sector can be split into two broad categories: vendors with a sourcing background and vendors with a transactional process background, according to Ovum. The main goal for the vast majority of procurement outsourcing providers is to be able to offer clients an end-to-end service, from sourcing through purchasing to payment, in an effort to compete effectively with market leaders IBM and Accenture, the analyst firm said. For vendors with a sourcing background, this means growing their capabilities around transaction processing and, in many cases, expanding their presence in low-cost locations, while for those firms with a transactional process background, it means attempting to gain domain expertise around sourcing functions, Ovum noted, adding that partnerships enable vendors to address gaps in their offering, and have long been popular in the procurement outsourcing space. "Service offerings cannot always be expanded organically, and partnerships offer a way of gaining access to key skills without the cost or disruption associated with acquisitions," said Thomas. Indirect spending -- the amount spent on goods and services that enable a company to operate -- remains the primary focus of most procurement outsourcing deals, said Ovum. As the majority of indirect spending categories are applicable to almost every business, vendors are able to operate across vertical markets, Ovum added. "Nevertheless, certain industries, notably manufacturing and consumer packaged goods (CPG), have been at the forefront of procurement outsourcing adoption", said Thomas. "Since 2008, there have also been signs of growth in other vertical sectors, including financial services, telecoms and pharmaceuticals".
  32. 32. Ovum expects to see significant procurement outsourcing activity in the energy and retail markets over the next two years, the research firm concluded. Source: Ovum, December 2009 Back to Top