Outsourcing Predictions for 2008

At the start for the year it is traditional to make predictions for the year ahead. Accordingly, I have reviewed a number of outsourcing blogs and articles and I note that the same themes come up regularly:

1. the rising cost of Indian resources
2. there will be consolidation within the Service Provider sector
3. BPO will finally come of age

This is pretty familiar stuff and very much internally focussed on the industry itself. I will not discuss these further here.

A couple of other predictions caught my eye though, being more outward looking, and are worthy of comment.

1. Will the US elections have an impact on the industry ?
2. Will the predictions of an economic downturn have an impact on the industry ?

Dealing with the US election first, it is noteworthy that there has been little or no comment by the candidates of either party on outsourcing or offshoring. This is contrast to the 2004 elections when there was rather more noise. A number of commentators have predicted that outsourcing is a dead issue but have promised to keep an eye out for any future comments. Personally, I am not sure it is a dead issue - in my view there are some embers there waiting to be fanned into flames. I have dealt with a number of US companies within the last year and there is still a nervousness about outsourcing, and a real fear of offshoring. The US politicians may not be talking about it, but companies are definitely taking account of the politics of outsourcing in their decision making.

Turnng to the potential for an economic downturn, a number of commentators suggest that this will support the continued growth of the industry as companies are forced to chase cost savings. However, one commentator suggests that an economic downturn could increase the TCV of deals being done because companies will have to bundle services in order to achieve costs savings quickly – whereas in the recent past they have had the luxury of being able to outsource piecemeal because cost pressures have not been so acute. I disagree.

I think that the lessons of the early mega deals have been well and truly learned and the multi sourcing trend is here to stay. This driver (economic downturn – or at least the threat of one ) is real, but the response will be different than that predicted here. My view is that companies:

1. Will continue to source from the recognised best in class providers
   a. To maintain service quality / manage risk
2. Will continue to source through 3rd party advisors
   a. To ensure deal acceptability and to enable timely internal sign off
3. Will move to complete deals more quickly
   a. To be able to recognise the benefits more quickly
4. Will consider doing deals in parallel rather than in series
   a. ie companies will (say) run a Desktop bid with one set of suppliers at the same time as doing a (say) network bid with a different set of suppliers
   b. This will have the same effect as increasing TCV (more spend addressed at the same time), but, crucially
   i. Spreads the performance risk (improved quality - the objective of multi sourcing)
   ii. Ensures the best price for each element (reduced price - no cross subsidies between Service Towers)
   iii. Allows each contract bundle to be closed out independently (increased timeliness – reduced interdependencies)

I also think that there will be other developments:

1. Further demands demand for increased contract flexibility
   a. Arising from companies contracting quickly, they will be looking for ways of making sure that they are not locked in to a bad contract
   i. Ie, if they “act in haste”, how can they prevent being forced to “repent at leisure”
   b. This will manifest itself in
   i. No exclusivity
   ii. Wider volume variations being asked for
   iii. Partial termination clauses becoming more common
   iv. Renewed interest in responsible Benchmarking
2. A greater willingness for companies to accept commodity services (vs bespoke)
   a. It is quicker/easier/cheaper to agree to what service providers want to sell
   b. There will be less notice taken of internal “naysayers”
   c. Outsourcing will be used as one (of many) weapon(s) to drive internal change
3. An increased opportunity for Service Pproviders to develop the nascent market for service integration
4. Alternatively to 3 above, there will be a boom in the recruitment of “hired guns” to manage deals

My message is therefore:

For Customers: Re-examine your business case - is it just about labour arbitrage or are you getting some quality improvements and risk reductions. How can you use the wider economic circumstances to your advantage ?

For Suppliers: Re-examine your contract terms. How can you make your organisation more easy to do business with ?

Predictions of the future will never be accurate, but having a point of view gives you something to measure the present against.

Happy New Year !