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Jan 31, 2010

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I always felt the most important challenge a company faces when it tries to grow is growth. Most IT service vendors started as small companies where scalability was not an issue. Today when businesses are more dependent on them it it time for them to ramp up. I think two key factors would be to have the right team and also a global org culture. Many companies become localized and tend to staff from one country which can paralyze them in the long run.

Phil,
Those were great insights from what is happening nowadays in this industry.
Outsourcing, as you stated, should be deeply analyzed by clients to identify if this solution would benefit them for the non core activities.
Clients should also have clear what is expected from outsourcing. The different benefits gained from outsourcing - like reduced costs, flexibility, grow capabilities, productivity improvement, follow the sun service, etc. – should be taken into consideration for a long term solution, and not only the cost, as it usually happens.
On the other hand, vendors should analyze how to operate the service once it is sold, as the sale’s pressure - and price reduction with the same services included - sometimes results in a difficult service to deliver, compromising quality service, customer’s satisfaction and profits in the long term.
Monica

Phil

The demand for outsourcing is definitely starting to show rapid upward momentum. Initial momentum will spike through organizations loosening their purses and daring to spend and hence clear backlog. We are still a few months away before discretionary spend becomes mainstream. Larger contract sizes will again be a thing of the present.
Continental Europe will seriously think on an offshore outsourcing strategy and will become more open like the UK. I believe that but for a few large organizations, they will take time to learn to get their expectations right before embarking on serious outsourcing activities.

The service provider canvass definitely shows signs of changing. While you ask, “can vendors cope?”…there is no option and this will happen through consolidation, collaboration and focus. We will see a number of mergers and acquisitions more for scale and same-time-zone presence than only for market reach. Size will continue to matter. Partnership amongst service providers will be the need of the day.

Many broad-spectrum IT and BPO services companies will now shed entropy and start concentrating on what they do best and build on these to augment delivery capabilities. Many will now mothball number of “like to have” service areas and vertical focuses for revival after a couple of years or three when the demand phase plateaus and monies have been made.

Technologies like the cloud, web 2.0 etc do show promise but not for immediate surge in earnings. How many companies can have their private cloud? If public-cloud how many cloudbanks are available and how quickly companies can adapt to this computing paradigm to see results in measurable period in the immediate future?

Way back in the late 1990s we said the next big thing to happen in the way we compute has already happened via Web services. Other than a few prominent examples, where have we seen this revolutionizing the computing landscape? What happened to the “central” UDDI servers? We still see number of organizations tentatively using dipstick tests for implementing SOA. SOA was touted as the Holy Grail for integrating all and any in an organization’s portfolio of applications!

New technologies will take time for adaptation by the industry and though these will play a role in enhancing opportunities for the service vendors, it will be some time before they provide the “buck for the bang” and not the other way round!

Taking a realistic view of what is happening now and what could happen soon, I see tremendous opportunities for some innovative deal structuring, addressing demanding payment terms and need for novel engagement models. I do not think the rates pressure will continue and on the contrary the rates for offshoring will increase and customers will be willing to pay. I will be surprised if rural sourcing does not take off big time in the US and a number of BPO style work delivered from these regions at lesser cost. This will result in more employment in the US.

We will see more small and medium companies jumping into the outsourcing bandwagon but they cannot have the standard engagement model where organizations demand dedicated teams, core teams with ramp up and ramp down facilities etc. Engagement models like shared services and commercial models like pay for work quantum will start gaining momentum and become the norm.

We could go on and on but then, one thing is certain, strategies employed during the boom times are not going to work as well anymore. A radical change in how we perceive and address; the market, the nature of our business and the imminent change in the demand pattern from the customers is mandatory if we have to buck the trends and emerge victorious.

The next few years are going to be fun for the daring but kind of dismal for those who would want to play safe.

Cheers, Ravi Ramanathan

There is a threshold within each vendor and within each relationship. The vendor limit is set by past experience. On the other hand,relationships come unstuck b'coz of one-two exceptions of poor performance and how the vendor responds to it.

We do know level of effort into outsourcing is about the same irrespective of size of deal - mid size companies definitely are a big opportunity but bring with it the complexity of vendors having to deal with too many at one time.

Finally, the killer is about promising too much in too little time- be it speed of ramp up, productivity, tools deployment, new process deployment. Quality is always compromised when time is short.

So chances are most companies will do a poor job if they do not understand their own limitations and seek to grow at a pace beyond their capabiity.

krishnakumar

Phil: Any Vendor can dissappoint.

A partnership is what you are looking for when insourcing, outsourcing, co-sourcing, nearshoring, or offshoring. Any type of sourcing, needs to be looked at to determine is it the right thing to do, does it make the best business sense, is there an ROI and what is the value add that the company, the customer, and the vendor partner receive to make this a successful venture.

Too many vendors do what is being asked and do not bring the experience they have gained from the outside to truly present a solution that solves a problem or brings a value proposition to the table. If they do they try to take a cookie cutter approach to a solution and try to implement one that worked for customer A to customer B even though it is a completely different environment and culture.

In order for Vendors to be successful and meet the demand they are going to need to "say no" some times. They need to focus on their strengths so that the customer can get the benefits of an expert not just a proposal that does it with little or no value add.

It may take a customer a little more time to get processes in place to partner with a few firms that allow them to be successful instead of trying to get one or two firms that sell that they can do it all.

Going from Labor Arbitrage to a value added solution takes investment from both the customer and the provider and with that partnership the demand can and will be met.

Jason

Yes, some service providers will disappoint. To add, some employers will also disappoint. Thanks Phil

Thought unit I - labor arbitrage delivery model has little to offer in an evolved market where we stand today. Saving cost is important but it's not the ultimate goal. Growth in topline is vital. Everybody is recognizing this.

Thought unit II - How does an organization use its IT assets/ services/ ecosystem to significantly improve its topline? Its new emerging need and IT department in most of the organization haven't yet learnt the method for doing so.

Thought unit III - thats what customer will expect from their IT service provider going forward. This suddenly brings IT in boardroom fand requires a strategic approach to deal with. Service providers who can evolve faster would sustain others will fall out.

Very insightful post Phil.

One thing that stood out for me: so much talk about clients not being ready to outsource, but not a lot about vendors being ready for their clients. Kudos for bringing this point out, backed up by real data,

Sean

@Jerry: agree re the hardening needed on the supply side. There needs to be a coming together of consultative skills and BPO delivery acumen to craft solutions that can address the challenge of many mid-market clients today. I think most vendors "get it", they are just fearful of breaking a successful revenue / profit model - i.e. "if it ain't broke, why fix it".

I hang out hope that most services vendors are pretty good at "reacting" to client demand. When the demand for the easy stuff subsides, they will get more active with evaluating their M&A needs to respond to the market.

@Melanie: to answer Jerry's and my points here, we DO need Wall St to understand the how services value propositions need to evolve in this environment and post labor-arbitrage,

PF

Phil,

You hit the nail on the head in your final paragraph: "The winners will be those that can step up and craft creative, innovative offerings and convince their shareholders they are doing the right thing".

Wall St does not care about anything beyond quarterly earnings, and does not understand that the current growth curve is short-term. If they generally understood how the services industry will evolve (Cloud, SaaS, innovation) they would help vendors be valued on their future earnings potential beyond winning labor arbitrage deals.

It's the short-term mentality of Wall St that is to blame for many things,

Melanie

Couple of points and all of this is good food for thought.
1. ITO will flatten unless buyer innovation increases. I would have said in 2009 that we were in stabilization mode. In 2010 it can continue or increase IF buyers start thinking about growing business rather than lamenting about the economic status.

2. BPO the level of supply is hugh BUT their qualifications are substandard. Many lack core business competencies and are marginal at delivery. As a result of a frail state many will fail or be consumed by larger groups. In order to adequately meet demand all sector require supply side hardening.

I have a very cynical answer from the perspective of a participant and an observer of this type of organizational change over a 32 year career.

Outsourcing to insourcing, back to outsourcing, and back to insourcing. This is a cycle that occurs every 10 years or so. Real business cases can be made for either approach being more desirable, based on cost, experience, competitive advantage, positioning of corporate expenses, and core competencies. I have seen it over and over again.

Service vendors will get and keep the business only if they can continually prove that they can provide the service at extremely competitive cost, and ADD VALUE that would be difficult or impossible for the customer to replicate themselves. The vendors that identify strongly with their customers, and structure their offerings almost as an extension of the customer's own organization will be most successful,

Laurel Bailey

Phil,

There is another challenge and that is for the client to understand exactly what they want and how much of a challenge to their existing ways of thinking, they are prepared to accept. Too often in my experience, the vendor will be willing to craft creative solutions but the client will not want them to do so, despite stating so throughout the tendering process. And my background is as someone who has managed outsourced services from the client side.

Stephen

Phil,

Now with improvement in demand for outsourcing we have witnessed an increase in job-switching among the talent of the vendors for better prospects.Attrition has its own implications for the existing clients who experience dip in quality of resource.

This may also be for another reason where vendor promises "A resources" to new account and bleed existing accounts.

I believe vendors must put as much stress on delivery to existing outsourced relationships as they do on acquiring new accounts.

The vendors who succeed in balancing this tightrope will definitely benefit in the current scenario,

Ratish Pandya

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