State of the Industry

Outsourcing Leaders Weigh in On the Industry’s Status and Future

Outsourcing has come a long way in the past 20 years and with the fast pace of change it’s hard to envision what it will look like in the decades to come. To help give us a clearer vision for the future, we asked thought leaders on their views of where outsourcing is now and where it’s headed.

Weighing in on these issues were two IAOP Hall of Famers William F. Concannon, President, CBRE, Global Corporate Services and Blanca Treviño, President and CEO of Softtek, along with experts Dr. Leslie Willcocks, professor at the London School of Economics, Swaminathan Dandapani, Chief Executive Officer and Managing Director, Infosys BPO Limited and Sonja McKeddie, Leader – Procurement Capability of Rio Tinto.

Emerging Industry

Is outsourcing still in in infancy, emerging or mature? Our experts all agree the industry is still emerging.  Compared to baseball, outsourcing would still be in the third or fourth inning, says Concannon.

If you look at outsourcing versus mature industries like accounting, outsourcing still has a way to grow to develop a strong certification process that influences appointments to jobs, and a strong research base and discipline, says Willcocks.

The way Treviño sees it outsourcing should be viewed as “always emerging.”

“The value an outsourcing professional provides today is significantly different from solutions of a decade ago,” she says, noting that outsourcing professionals are in the early stages of leveraging cloud computing solutions, while Forrester predicts that by 2020 at least two thirds of every outsourcing engagement will have a significant Cloud-based component.

Infosys’ Dandapani views the outsourcing profession as “still young and still emerging.”

“It is really heartening to see more and more clients seeking ‘value enhancement’ versus  ‘cost reductions’ through outsourcing and  outsourcing professionals moving steadily from being ‘transactional’ to being ‘transformational,’” she says.

Even with the continued growth and acceptance of outsourcing, the thought leaders don’t anticipate a time where 100 percent of customers surveyed will say they use it.

Treviño says this is because of the industry will always have emerging areas. “What is core today is best done by a partner tomorrow,” she says. “Outsourcing enables customers to focus on areas of differentiation, and outsourcing partners innovate in areas that can add value and synergies across a larger set of companies.”

While it won’t be 100 percent, Dandapani expects significantly large number of customers around the world will either already be users of outsourcing or will be seriously considering outsourcing as one of their key strategic business efficiency and effectiveness drivers.

Drivers Intensify

The experts see the same drivers continuing for outsourcing in the near-term, including short-term cost savings, innovation and flexibility, as well as new ones.

“The drivers will intensify,” says Concannon. “Cost pressures, competitive pressures, need for access to increasingly specialized skills and talent, and the desire for flexibility all seem likely to be with us for the long term – and all are drivers of outsourcing.”

Treviño anticipates that companies will outsource more to innovate and launch products faster as Nike has done.

“While outsourcing will remain a viable way to achieve savings, the driving force for adoption will be shifting to increasing revenues and EBITDA,” she says.

In the near future, Willcocks says cost reduction will remain a main driver, leading to bigger moves into BPOI and eventually cloud computing, where there are more savings to be had than in ITO.

Looking ahead into the next five years, he envisions the we will see a continuing trend towards making partnering less rhetoric and more a reality, a continuous maturing of the retained capabilities needed for outsourcing, and improvements in outsourcing performance as the principles and good practices become more accepted partnerships.

While cost considerations will continue to be important, Dandapani says the drivers will significantly be around agility, speed to market new products and services in existing and/or new geographies and countries, business value realization, technology absorption and realizing innovation through collaboration.

McKeddie says she expects labor arbitrage to reduce in overall importance, as organizations experience other business drivers that prompt them to explore outsourcing as a solution. These new drivers could include access to talent in constrained labor markets, ability to ramp up quickly to support growth objectives, and access to best practice tools and processes, such as procurement, she notes.

Asia Influences

How will the geo-nomics of China and India affect offshore decision making and impact customer’s selection and provider’s options? (See our story in this issue on China’s Crossroads)

As a customer, Rio Tinto, a leading international mining group, looks to both its providers and analysts to provide insights on the impact of China’s emerging capability in BPO and how it will impact the industry as a whole.

“We will monitor trends and forecasts on wage growth, and also read with great interest the investment that China is making internally, by supporting their own government organizations with Chinese outsourcing providers,” says McKeddie. “We expect the options for customers to be greatly enhanced in the next two to five years and providers must ensure they also have presence in that market.”

China will come on stream as a provider quite slowly, says Willcocks, who anticipated this rate in 2010 in the book China’s Emerging Outsourcing Capabilities.

Major Indian companies will continue to move up the value chain and offshore themselves, as well as spread certain capabilities into client countries, he predicts.

“There are over 120 offshore ITO/BPO  locations in the world and client companies will increasingly look to diversify their risks by using several locations, not least in the continuous search for more cost effective arrangements,” Willcocks notes.

Treviño notes that China and India have two different strategies and market dynamics.  While India is a powerhouse in ITO and BPO, China has focused on creating a strong electronics industry based on high-tech manufacturing, on top of other manufacturing supplies. For IT, China has a very strong and highly specific domestic market, but has struggled to create a brand for offshore outsourcing, she says.

“What is common for both, as well as for most other destinations, is that value through labor arbitrage will continue to diminish,” she says. “Outsourcing professionals have constantly evolved to shift to results-oriented engagements. If you are just chasing the lowest rate card, you will eventually run out of places to go.”

Increasingly, customers and outsourcing professionals will sharply differentiate between “Outsourcing” and “Offshoring,” Dandapani predicts.

“When customer’s expectations move from ‘transactions’ to ‘transformation’ customers will seek out global talent, best in class practices and global benchmarks, both in the developed and emerging economies,” she says.

This change will impact not just India and China but several other emerging economies that will see an impact in their offshoring ecosystem due to increased local and global demand, leading to competition for good quality talent, according to Dandapani.

However, countries  like India and China  will continue to “Enhance the GDP”  (Growth, Differentiation and People) of offshoring by their sheer focus on human resources, scaling them up to provide differentiation and through this differentiation spur industry growth, she says.

Clouds Clearing

The value of cloud computing has not yet been fully reached and will accelerate, the leaders says.

“Today the building blocks are networks, routers, servers, desktops and applications – Platform as a Service,” Treviño says. “Tomorrow, the building blocks will be applications, applications and applications, and how you connect them quickly and securely to support ever changing business process innovation and improvement. On top of those applications we will start to see platform-enabled horizontal solutions. Cloud is a real game changer for the next phase of the outsourcing industry evolution.”

The lack of organizational readiness and the recession has delayed cloud’s takeoff, Willcocks says, who anticipates the technology use accelerating now through 2015 where it will be used for both cost savings and innovation.

The impact of cloud computing will be shared services, multi-tenancy, pay per use, focus on minimizing CAPEX, outcome-based pricing models and technology being seen as a journey to drive business outcomes versus technology being seen as a destination, according to Dandapani.

McKeddie expects that customers will become more sophisticated when it comes to their expectations from providers, as they develop their own understanding of how to best leverage the cloud.

Items such as governance suites and mechanisms could be deployed via the cloud, enabling customers to access best practice tools at low cost, she says.

“Providers would benefit from deploying a standard suite, streamlining their own internal efforts when it comes to engagement management,” McKeddie says.

Professionalism on the Rise

The use of certified outsourcing professionals with designations such as IAOP’s Certified Outsourcing Professional (COP) will continue to increase, our leaders predict.

Softtek’s Treviño said customers are increasingly recognizing the value of having these professionals on the team managing outsourcing relationships.

“The curricula of outsourcing professionals will be geared towards how professionals can contribute more value and in a more disciplined way to drive innovation and achieve the customer’s end goals,” she says.

“That brings us back to the absolute need of organizing work differently, with the right processes and IP to drive real innovation in outsourcing. If the service delivered is staffing, the value added by the partner will be limited to individual contributions – with little differentiation and economies of scale.”

Infosys’ Dandapani sees certification and specialization in tandem being in demand.

“As outsourcing gathers momentum and new innovative operating and outcome models are introduced outsourcing professionals with domain capability in vertical industries being able to understand the nuances of the business of their clients and their industry drivers will be key to success,” she says.

Among the service areas where functional expertise will be extremely relevant in verticals industries are finance and accounting, sales and fulfillment, strategic sourcing and procurement, customer services, HR Services, and analytics and reporting services.

Rio Tinto’s McKeddie notes that while many organizations assign people a role in managing their outsourcing engagement based on their line management experience, those skills don’t necessarily match what is required.

While it hasn’t seen higher traction yet, McKeddie sees increased use of professionals coming. Increased visibility and recognition of certifications will make it easier for companies to find resources with the appropriate skill sets to support strategic initiatives, she says.

The Big Picture

What one major change do we expect to see in outsourcing in a near future?

Into the future, experts see greater integration of outsourcing into the business, outsourcing increasingly delivering bottom-line value and more customers seeking strategic counsel.

“The combination of a consultative solution offering combined with outsourced execution is a growing trend we are keeping a close eye on,” according to CBRE’s Concannon.

Willcocks sees outsourcing providers becoming more involved in the business and delivering strategic critical activities and managing more end-to-end processes. However, this will depend on the maturity of governance, partnering, contracting and skills needs to leverage outsourcing into these performance areas.

The biggest change will be companies realizing the value of outsourcing by positively impacting their gross margins versus being used to control costs, Dandapani says.

One thing is certain, change will be constant.

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