2010 Predictions for the Outsourcing Industry

Firstly: my apologies to everyone for hopping on the perennial "Predictions Bandwagon".  One may as well say "Stop press everyone, I'm just such an important smarty-pants you should listen to ME ME ME!"  As Newt Gingrich told us earlier this year:  "There is not one living being that can accurately predict the outcome of this crisis, all we can do is continue the dialog and the answers will slowly unravel". 

Secondly:  we've conducted two major studies with outsourcing buyers globally this year (and am currently sifting through 800 responses - and counting - from our current industry study).  While we can evangelize, prophecize, pontificate and sermonize, nothing can substitute for real data on what everyone is currently doing and planning to do.  We have the platform here to do that, and I personally thank all of you who took a little time out to share their views, actions and intentions.

And Thirdly: I'm just such an important smarty-pants you should listen to ME ME ME!"  So maybe I can help with the unraveling?

i) CIOs and CFOs will be uniquely challenged to avoid becoming "Cartoons of the Recession". 

Simply put, when there's a serious recession in the works, the job of the CIO is relatively simple - cut costs and squeeze your suppliers using whatever means are at your disposal.  CIOs rarely get fired in this scenario, unless they somehow messed up the cost-cutting. 

Their real challenge is when we emerge from the recession; the spotlight is firmly on them to deliver value.  They are, quite literally, drowning in options, and it's a major challenge to convince their peers they are capable of driving new business value into the organization.  CFOs will be similarly challenged by the fact that they are going to have to prioritize investments versus cost-containment initiatives, exacerbated by the realization we're moving into a period of drawn-out economic uncertainty, and not the classic economic recovery-cycle.  Their options are as tough, if not tougher in this "New Normal".  Outsourcing is one key component to help crystallize these options - driving out cost, while creating new avenues of possibility.  The CIOs and CFOs who "get" sourcing will be in the driving seat.

ii) Labor arbitrage will continue to dominate outsourcing, but the smart providers will be focused on providing consultative value to their clients. 

Most new outsourcing contracts are still dominated by customers which have got lots more room for maneuver with labor arbitrage.  Sadly, this will continue to dominate most of the deals in 2010, and we'll see the tiresome cost-per-FTE price battle continue. 

When you consider that 75% of service provider staff for ERP development and support are still onshore, there's a lot more wiggle-room for new and existing clients to cut costs through lifting-and-shifting work offshore.  With commodity services areas such as ERP software development and maintenance, and transactional accounting processing, it's getting harder and harder for service providers to command higher price-tags in this New Normal. 

Those providers proving operationally-efficient and cost-competitive to win this labor arbitrage work today, will find themselves in a strong position to push higher-end business transformational services in the future, because they will already be present within clients delivering operational work.  They need to demonstrate they are capable of learning their clients' businesses, in order to move up the value chain to take on more consultative work.   Those providers which only focus on providing cheap body-shopping for commodity services, will get usurped from the market quite quickly.  Worst still, not many of the leading providers are likely to acquire competitors which only have a transactional skill-set and low-value client relationships.

iii) Sourcing advisors will increase their influence in the market. 

As the analyst business consolidates, many business leaders are looking further afield for inspiration, validation, data and advice.  Especially in the sourcing world, where the best advice is often coming from those living the experience in the field.  Our forthcoming survey results will reveal this is happening.  Business decision-makers today need advice that can be made available in personalized models from experts that can deliver it.  The smart advisors are going to be those which can adapt and scale their experienced talent seccessfully in a semi-customizable model.

iv) We'll see at least two mega-mergers among the service provider-base. 

 We'll see a couple more mergers on a similar-scale to Dell/Perot and Xerox/ACS.  Expect at least one involving a traditional incumbent and an Indian-HQ-ed service provider, and at least one other between one of the pure-play BPOs and an IT-centric services provider.

v) BPO will rebound to have its strongest-ever year. 

2009's been a somewhat damp-squibb for mega-BPO deals, and while we've seen a lot of small-engagements and a few captive buy-outs, a lot of BPO decisions were delayed due to the crisis.  As expected, ITO's been the first to emerge strongly from the recession, as this is the most mature market where deals are transacted fairly quickly today.  However, for many companies, especially those which have already outsourced much of their IT, the next wave of obvious cost-savings are to be found in BPO areas. 

As our soon-to-be released new survey is revealing, transactional finance and accounting BPO will have a resurgence in 2010, with additional interest in management reporting, and we'll also see a fresh wave or HR outsourcing, which has been quiet for a couple of years now, with new uptake in payroll, benefits admin and recruiting outsourcing.  Procure-to-pay outsourcing is poised to accelerate, but we are unlikely to see muchrenewed traction in strategic sourcing services.  We'll also see renewed focus in the analytics space across several verticals and horizontal areas.

vi) Cloud will emerge, but its definition and concept will get diluted and confused. 

Yes, Cloud is the future and a major game-changer, but - like everything else in the IT world - the definition and meaning will get diluted and confused (remember SOA, EAI, CRM, E-business etc etc).  The winners in this game will be those providers which can articulate exactly what Cloud means and how companies can start evaluating Cloud-based delivery models.  Cloud will become closely intertwined with outsourcing,  and we're already seeing many service providers developing their Cloud-strategies.

vii) The speed of change will become frantic and frightening for many.  

While in the good ol' pre-crisis days, firms could take time over major (and sometimes disruptive) business decisions, companies today are having to make them much more quickly, and move much more aggressively to execute on them.  This is particularly relevant where outsourcing is concerned. 

As we've seen in the past few months, many of those sourcing decisions that were delayed during the first half of the year, quickly came to fruition recently, as firms realized economic armageddon has been averted, and it's time to roll-out the new corporate agenda: quickly and aggressively.  2010 will not be a year for the timid, and we'll have a lot of frantic people trying to grapple with outsourcing - we'll see more political pressure, more negativity, more case-studies, more value propositions, more momentum and more energy  than we've seen yet in this crazy industry.

viii) And finally... 

I predict England will win the 2010 World Cup.  Now you know how accurate I am -:)

 

Comments

[Phil Fersht]

Vinay:

see this -

http://fersht.typepad.com/the_outsourcing_bloghorse/2010/02/newnormalsurvey6html.html

PF

[Vinay Firake]

Phil,
Great summary. However, interestingly, there's no mention of outsourcing of industry-specific processes. Don't you think that'll be a large part of BPO deals?

[Marcell de Arrais]

Your predictions is according to Brazil expectation.

p.s. Including Brazil as the winner of the 2010 World Cup..

Cheers

[Ken Cameron]

Phil, great post!

I am a newcomer to your blog, but have been in and around IT or 40+ years and infrastructure outsourcing for 16 years. I am currently with a small consulting firm focusing on Selective (customized) outsourcing arrangements for medium to large enterprises. Interestingly, most of your points are very pertinent to how we see our business in 2010, namely:

i. CIO/CFO,
ii. Labor arbitrage,
iii. Advisors,
vii. Cloud,
viii. Flexibility and Agility
- and possibly -
iv. Vendor Shuffle.

We have formed partnerships with a broad array of firms (on and off-shore), to put together custom, targeted solutions to a client’s requirements. We rarely get involved in "all or nothing" deals. We generally perform a high-level assessment at a small or even no charge, resulting in a set of recommendations that may or may not result in a longer term relationship. In other words, we come in as the Advisor (iii.). We customize a solution (or solutions) that focuses on Flexibility and Agility (viii.) usually involving a combination of appropriate partners with a combination of resources (ii.). Our goal is to assist the CIO (and CFO?) avoid the issues you mentioned above (i.)

We are keeping our eye on the Cloud marketplace with the understanding that it will play a major role in enterprises and, therefore, we want to ensure the Flexibility/Agility is built in to take advantage of the benefits of Cloud Computing as they become more appropriate in an enterprise environment.

Some specific comments about your bullets:

i. CIO/CFO – the combination of the economy, the pending recovery, compliance issues, and an acceleration of both technology and technology packaging, is making life both fascinating AND challenging for IT management (especially as they have reduced resources). A CIO has to cut costs, but be ready for the recovery, keep focused on all of the compliance issues (SOX, HIPAA, PCI, Privacy, etc.), and fend off a constant stream of questions about why or why not SOA, Cloud Computing, Social Networking, Business Intelligence, and many other fast moving concepts. All of this increases the need for the Advisors you suggest in bullet iii. One of the major areas where these Advisors can help is a combination of ii/vii/viii which I classify as service provision.
ii. Labor – we have seen somewhat of a backlash against off-shoring, but it definitely has not stopped it. As you point out, the FACT is that not all that much has been off-shored - yet. Most of it has been done in Applications. I believe we will see more of a hybrid approach for infrastructure, where there is a cadre of on-shore (possibly even on-site) expertise, with a backdrop of off-shore resources to fill out the requirements. A better job needs to be done by vendors (or partnerships of vendors) of integrating the on and off shore teams. We see this as a longer term role for those “Advisors”.

iv. Vendor shuffle – as I mentioned above, I am working on “customized” scenarios involving multiple partners that might otherwise be considered “strange bedfellows”. Isn’t it interesting that Xerox buys ACS (a combo BPO and ITO player), and yet, also announces that they have outsourced the Xerox internal IT infrastructure to HCL? Hmmm. For that matter, you have an interesting set of dimensions within IBM: they sell computers and software to enterprises, do outsourcing for enterprises, have an extensive off-shore operation, and, is setting up for a huge play in Cloud Computing. I can’t wait to see how that plays out. (See my comments below about mainframe.)

vi. Cloud – a very interesting topic in respect to enterprises and outsourcing. IMHO, the market for clouds falls into three "user" categories (sub-markets), 1) consumers, 2) SMBs, and 3) enterprises. Consumers and SMBs will tend more towards external public clouds, while enterprises will be more focused on internal private clouds with some external private clouds (is an external private cloud the same as outsourcing?). I also see what you mentioned above, namely, that some of the traditional outsourcers are making cloud noises. This will be a philosophical challenge for the “pure” outsourcers. Their business model is based on long term, typically inflexible contracts. Clouds are flexible, pay as you use models. How will the pure outsourcers transform from the historical model to the future? I expect we will see traditional outsourcers develop a RIM/managed services offering that runs private clouds – internal, hybrid, and external.

vii. Flexibility and Agility – when you tie all of the above topics together, I believe this prediction becomes fairly obvious. But that is why I think this bullet, combined with i. CIO/CFO, should almost be treated as an overall summary bullet that really encompasses all of the others.

Just for fun, I think there is another prediction for 2010 that you missed, specifically, Mainframes. I have been in IT for over 40 years, starting my career working on mainframes. Ironically, I spent quite a bit of time on the mainframe versions of VM. In the 70’s and 80’s, IBM downplayed VM as “non-strategic”. It appears that IBM has “seen the light”. They recently announced a z/VM-z/Linux ONLY version of the z/10 mainframe. We are hearing about both z-OpenSolaris and z-Windows. They have been aggressively lowering the total cost of ownership in this arena. In 2010, predictions are that IBM will announce the new generation z/11 and there are rumors of an x86-related component. Could this be part of IBM’s Cloud Strategy?

This comment is WAY too long, but that is your fault for packing so much meat into your post.

Ken Cameron, Windsor Group

[chris coyte]

Phil:
Great read as normal - Thx. Interested in your further comments re: point vi; I thought Cloud had already 'emerged'! It is a game changer so what will happen next and who will go first?
Chris

[David]

Special thanks for valuable information about outsourcing industry.

[David]

Phil,

Great to see you have not only maintained your critical edge on the dark side, but you've added to it :)

This is a superb collection of thoughts for next year - the best anyone has produced in a long, long time. Bravo.

David

[Gaurav]

Phil,

Very, very informative. Thanks for sharing,

Gaurav

[Phil Fersht]

@Everyone: I also predict that (viii) could be a little wide-of-the-mark, but naively take the view that it may add some karma that it could actually happen if I predict it -:)

PF

[Phil Fersht]

@Stephen: Without revealing actual names, I would predict one, or both, of the two leading BPO pure-plays will get acquired. Also predict at least one of the second tier Indian providers will get acquired by one of the leading incumbents to add major offshore scale to its business,

PF

[Suzanne D.]

Phil,

I predict that you are indeed a smarty-pants -:)

Suzanne

[Matt]

Phil,

I share your positive outlook for BPO rebounding next year. Definitely been a lot of companies putting plans on hold - especially in F&A and KPO/analytics. Look forward to seeing what the data from your survey reveals,

Matt

[Stephen Cohen]

Phil,

Like Sandeep, I was right with you for the first seven! Love to know which of the providers you believe could merge,

Stephen

[Amanda Hare]

Phil - very good insights on BPO. I agree that many companies will increasingly turn to areas such as HR and accounts once they have squeezed IT as hard as they can for every last drop of savings. You do have to wonder about the added complexity and disruption businesses have to go through by moving out people, as opposed to technical functions... I know many companies have found BPO much more challenging, and the cost savings not as attractive once they get the wheels in motion.

p.s. I love the world cup prediction -:)

Amanda

[Neal Matheson]

The "Cartoons of the Recession" prediction is right on the money, Phil. Several CIOs I have spoken to are increasingly concerned with positioning their departments as value-add contributors to the business, as opposed to cost centers. The IT industry in general, is going to have a tough time proving its value to the cynics in this post-recession era.

Excellent predictions. Not too convinced about the World Cup one,

Neal

[Sandeep Sood]

Damn. I was with you until point viii. Sorry, Phil, but the US is ready to party like it's 1776.

Otherwise, your predictions are on point!