Outsourcing’s Threshold Moment

The latest survey of IAOP members finds that outsourcing is entering a new phase in its development. This phase will be characterized by rapid expansion across the enterprise and cloud-based solutions, led by internal teams of well-trained and seasoned professionals.

By Michael F. Corbett, Chairman, IAOP

It’s not too bold to state that we are about to witness a “Golden Age” of outsourcing. Perhaps when Peter Drucker penned his now famous op-ed piece for The Wall Street Journal, entitled “Sell the Mailroom”, he envisioned the globally interconnected business community of today.

Here’s a relevant excerpt from Drucker’s prescient column, which first ran in July 1989:

“If clerical, maintenance and support work is done by an outside independent contractor it can offer opportunities, respect and visibility. As employees of a college, managers of student dining will never be anything but subordinates. In an independent catering company they can rise to be vice president in charge of feeding the students in a dozen schools; they might even become CEOs of their firms.”

This world of opportunities described by Drucker is not only here, but based on the results of IAOP’s most recent member survey, we stand at a threshold moment for the profession and industry of outsourcing.

Outsourcing is on the verge of a rapid expansion across the enterprise, enabled by cloud-based solutions and driven by internal teams of “A-list” professionals. An analysis of our most recent member survey sheds light on this fortuitous confluence of trends.

IAOP’s Annual Member Survey

IAOP annually surveys its global membership, with the support of the management consulting firm Accenture. The most recent survey was conducted from mid-December 2010 to mid-January 2011, eliciting 329 responses from a roughly equal number of customers, providers and advisors.

Virtually every region of the world was represented. The United States represented the most mature market, dominating the globe in terms of where most organizations have their primary operations as well as almost every industry segment.

It’s also interesting to note that these respondents are seasoned veterans of outsourcing. Seventy-one percent are from organizations with more than five years experience with outsourcing and 47 percent are from organizations with more than 10 years of experience.

Insight #1: The Recent Economic Crisis has been Good for Outsourcing

The 2008-09 economic crisis – which certainly has rocked the world – also has tested many facets of the economy and many assumed “truths” in our business. Entire asset classes have been revalued. Highly leveraged business models are far less attractive. Risk is once again seen as something quite real, not simply a buzzword used to justify unsustainable returns. The world’s economies are seen as far more interdependent than ever before. And, employment as a measure of size and success will never be thought of the same way.

Against this backdrop, outsourcing has not only survived, but expanded as both a management practice and as an industry. Over the past 12 months, IAOP’s customer members report a significant expansion in both their current outsourcing programs and in their plans for the future.

Only 15% of our members report that over the past 12 months their current outsourcing programs have either been significantly curtailed or cancelled (2%); continued but with reduced services (2%); or continued with reduced volumes (11%). The latter percentage is arguably more attributable to the changes in customers’ business volumes, as to any conscious decision to reduce the amount of work outsourced.

This means that 85% of IAOP’s members report that the current level of outsourcing within their organizations has stayed the same or increased over the past year. In fact, 24% report increased volumes and15%, increased services; 31% have kept their current contracts in place with some renegotiating, and 16% have continued their current programs essentially unchanged.

Even more importantly, a full 80% of customer organizations indicate that their future outsourcing plans have been expanded to pursue more, new opportunities; 19% report that their plans will continue unchanged. Only 20% indicate that they have curtailed future outsourcing plans. The charts flesh out the numbers in greater detail.

At the same time, these professionals are reporting a significant recasting of the reasons that companies outsource (see Figure 3 – multiple responses permitted). Reducing costs is now seen more in terms of increasing business flexibility (59%), achieving long-term savings (56%), and achieving short-term savings (40%).

Using outsourcing to support future business opportunities is now more important to 62% of respondents and accessing skills and talent are more important to 40%.

Separately, data provided by outsourcing service providers as part of IAOP’s annual review and ranking for the world’s best outsourcing service providers – The Global Outsourcing 100 – shows that the industry not only continued to grow throughout the economic crisis, but returned to a quite healthy 10% rate in 2010.

However, revenue growth no longer equates to employment growth, as providers learn to become more efficient. Employment growth in the outsourcing industry was 4.5% in 2010 versus 6% in 2009. Nonetheless, the top 200 outsourcing companies employ about 4 million people globally.

Full questions read:

• More focused on supporting our company’s plans for growth
• More focused on increasing our business flexibility
• More focused on creating new business opportunities through partnerships with our providers
• More focused on accessing skills and talent not otherwise available to us

Insight #2: New Approaches to Outsourcing are Emerging

So not only has outsourcing expanded and become more linked to future business needs over the past 12 months, the very way companies are outsourcing is changing as well.

The most notable of these changes is cloud-computing (or perhaps better called Internet-computing). The term “cloud”, of course, has become all the rage over the past year, making its way into investment advice, product advertising, and even a popular TV show or two. But make no mistake about it, when it comes to outsourcing, the cloud is a lot more than a mere buzzword.

Two-thirds of IAOP’s customer members report that their organizations have either implemented or plan to implement cloud-based outsourcing solutions over the next year. In fact, of those, two-thirds either have or intend to implement cloud-based outsourcing solutions in more than one functional area of the business. Figure 4 shows the percent of organizations implementing cloud-based outsourcing solutions by functional area, alongside the percent of providers who either are or intend to offer cloud-based outsourcing solutions in those areas.

Not surprisingly, information and communications technology, which include infrastructure as well as common business applications, is the top area for cloud’s incursion. However, the range of functional areas already being addressed through cloud-based solutions may surprise many.

Cloud-based outsourcing solutions have or will be implemented most commonly in the areas of customer relationship management, human resources management, transaction processing, financial management, document management, and administrative services – essentially, across the entire enterprise and especially within areas where outsourcing already is commonplace. It appears that the provider community is in good alignment with where their customers are leading them (see figure 4).

The factors driving cloud-based outsourcing generally mirror what we’ve seen for outsourcing overall for many years. (figure 5). That said, there perhaps is one area that stands out as unique: speed, or as IAOP’s survey called it, “Faster Implementation”.   This speed of implementation nosed out volume flexibility and, taken together, really highlights the big benefit customers see in cloud-based solutions: speed and flexibility.

But don’t be fooled into thinking that customers are rushing headlong into this new delivery platform. Risk and performance concerns dominate a lot of the internal customer dialogue and it’s fair to say that full adoption can’t take place until the risks of cloud-based outsourcing are fully understood and mitigated to the customers’ satisfaction. The point has been made for some time: companies that don’t outsource are typically so concerned about the risks, they’re unable to see the potential benefits.

Although cloud-based outsourcing is probably the biggest change in the outsourcing delivery model underway, it’s not the only one.

Fifty-seven percent of IAOP’s customer members tell us that they are looking for more contracts with greater flexibility. Forty-six percent are moving toward more knowledge-based activities in terms of what they’re outsourcing and 38% are looking to reduce their provider portfolio through more bundled relationships.

Finally, offshoring is increasingly becoming “allshoring”. While 32% of customers say they are looking more at offshoring today than a year ago, 27% say they are looking more at nearshoring (11%) and onshoring (7%) options.

Providers are listening here as well.  Based on the data provided for the 2011 Global Outsourcing 100 ranking, the average outsourcing service provider now has multi-client service centers in 11 countries.

Insight #3: Outsourcing is Increasingly Driven by Internal Teams of Professionals

When IAOP was launched a little more than five years ago, it was the first organization to popularize the term “outsourcing professional.” To be sure, advancing the profession and industry of outsourcing is the association’s core mission. That vision is today’s reality.

According to this most recent survey, the average client-side organization now has between 10 and 50 outsourcing professionals on staff. Twenty percent have more than fifty outsourcing professionals and almost 10% have more than 100. Moreover, 43% report that the number of outsourcing professionals at their organization has increased over the past 12 months, with 24% indicating that the growth has been by more than 10%. This would appear to be one profession where job loss is not a concern.

The increased number of outsourcing professionals is being matched by increases in compensation, as the value of their work and the competition for real experience and knowledge increases across the field. Only 6% report lower wages for outsourcing professionals, while 53% report wages holding steady and 40% report wage increases.

These professionals are now being deployed as teams across the organization. Fifty-five percent work within the functional areas themselves, 25% operate out of centers of excellence supporting the entire organization, and 19% are within the company’s shared services operation. These professionals work across the outsourcing life-cycle from strategy development (68%) to governance (89%).

Insight #4: Socioeconomic Trends Are Positive – Not Negative – for Outsourcing

All the overheated political rhetoric lately about how outsourcing exacerbates domestic unemployment might foster the notion that outsourcing’s negative reputation will ultimately overshadow its positive impact on business and society. However, there’s nothing in the survey data to suggest that this is actually the case.

In fact, 95% of customer respondents indicate that the political controversy and subsequent protectionist initiatives have exerted no negative impact on their organization’s actual outsourcing decisions. Twenty-two percent do say that they are more careful to avoid awareness of their company’s outsourcing activities, making the matter one of messaging and not reality.

What is happening, however, is that outsourcing customers and providers are working even harder to make their programs socially responsible. Seventy-nine percent of customers and 71% of providers say that Corporate Social Responsibility (CSR) is an important to critical part of their outsourcing programs.

Within this broad area of CSR, customers care most about labor practices (75%); operating practices (62%); environmental issues (46%); and human rights (44%).  Providers generally match-up with those same concerns with an additional focus on community involvement, because attracting and retaining talent within their respective communities is so critical to their long-term business interests. (Figure 7.)

Despite their occasional grandstanding on the issue, even politicians are beginning to grudgingly acknowledge that outsourcing – when equated to offshoring – is a two-way street that creates economic prosperity and jobs.  U.S. President Barack Obama made that exact point during his recent trip to India.

More vividly, no one can watch the events in the Middle East of January 2011 without recognizing that an underlying driver of unrest is unemployment among educated and non-educated youth alike. One study suggests that the Middle East and Northern Africa will need to create 100 million jobs by 2010, just to stabilize their employment situations.

Summary: The Future is Now

Our interpretive analysis of this survey data leads to one inescapable conclusion: We stand at the cusp of The Golden Age of Outsourcing. The drivers are four-fold and interrelated:

1) The socioeconomic trends discussed above.

2) The emergence of a new platform for outsourcing – that is, the cloud as it’s popularly called.

3) New and improved industry practices.

4) The continued development of outsourcing as a management discipline.

We’ll see a continued rapid expansion of the use of outsourcing enterprises around the world. What’s more, the recent economic crisis taught us all a lesson not soon forgotten, to wit: real business transformation – something that outsourcing excels at delivering – is needed for sustainable growth. That’s because organizations don’t know what they don’t know and only by bringing in partners can these “unknowables” be learned.

Outsourcing has itself become a recognized organizational competency. Companies now see this and are beginning to make the necessary investments to build these skills across their organizations. This new breed of outsourcing professional is advancing management and practices and processes that are able to produce consistent, high-quality outcomes.

The components are all in place for 2011 to be the year that outsourcing becomes a truly global platform for business transformation and growth. Those of us working in the field already know about outsourcing’s enormous potential to spread prosperity; the rest of the world is quickly catching on.

NOTE: Please see the latest issue of Globalization Today Magazine at http://globalizationtoday.com/february-2011 to see all the charts that accompany this article.

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