Future of outsourcing: Tug of war for outsourcing pie

Outsourcing of services in the next two to three years will witness new trends in an increasingly complex and fast evolving techno-dependent world. A flatter global economy, demand for new areas of offshore work, and new players competing with India and China will define intra-industry competition.

It’s going to be survival of the fittest as emerging economies such as Brazil, Mexico, Malaysia lock horns with India and China. What’s at stake will be an increasingly fragmented and sophisticated pie of globally outsourced work.

India and its neo-competitors will have to show commercial nimbleness to pounce on every single outsource contract that’s up for grabs. Otherwise they might get left behind in the consolidation that will ensue in outsourcing in the next three years.

The strategic goal of every outsourcing outfit in the world will be to be ready when the global economy turns the corner. Meanwhile, a key growth driver will be the domestic economies of India, China and Latin America, and how well global players plug themselves into their domestic outsourcing business.

On taking into account the current economic climate, and prospective changes, trends in outsourcing can be outlined for the nearest future.
 
At the outset, it will be enlightening to begin with the recent report by Gartner Inc, the world's leading information technology research and advisory company.

Their online survey of 116 companies across Western Europe indicates that, “… today’s market is characterised by a high volume of activity across the board.” It adds that for many clients outsourcing will involve intense renegotiations as against renewals and new deals in 2007-08.

It should be glad tidings for the Indian outsourcing industry, as those surveyed cited cost optimisation as their number one priority. More than 70 per cent of respondents rated budget and cost containment as their top concern in 2009, up 17.5 per cent from 2008.

And this trend will continue. The focus on cost reduction will drive a high usage of outsourcing and global delivery in Europe in 2009 and 2010.

The survey also pointed out that European organisations will show an increasing interest in alternative delivery and acquisition models (ADAMS) such as infrastructure utility (IU), software as a service (Saas) and cloud computing among others.

On the whole rosy as the picture may be, contraction, at least till the next three or four quarters, in Western economies, will intensify competition in the outsourcing industry. Many offshoring markets will cease to exist even as more suppliers emerge to provide outsourcing services.

It’s quite possible that there will occur a merging of companies that provide outsourcing services. A natural corollary will be that bigger players in outsourcing will acquire or take over smaller ones.

This evolving macro scenario will compel smaller players in outsourcing to develop expertise in handling niche outsourced work to survive and cope with the scale of dominant players. Strategically poor vendors will either exit the market, or be absorbed by larger outsourcing providers.

Geography too will be under the scanner as globalization in outsourcing will lead to companies outsourcing closer to their homes. Apart from savings, nearshoring, as it is called, will ensure better communication and project management. In effect, India and China will be challenged by locations that are closer to US and European companies.

The tough economic climate will force many outsource outfits to seek shorter outsourcing contracts. It will allow them to adjust volumes and service level terms.

Global uncertainty, as a result of the world economic meltdown, will lead companies to lower their overall spending on IT. Clients will perforce create short-term business plans focused on spending rather than long-term investment. Due to this, companies will seek shorter outsourcing contracts to be able to properly adjust their volume and service level terms.

This trend will gradually lead to significant change in the vendor’s outsourcing mindset – more and more vendors worldwide will strive for creating service offering at competitive rates and with appropriate differentiation for the marketplace.

The emerging emphasis on the cost-output ratio is tailor made for Indian outsourcing companies who pride themselves for their operational efficiency in outsourcing.  

A lean and mean outsourcing outfit will be better prepared to take on the red hot trend of P2P offshoring (or person to person offshoring). While offshoring is usually associated with big and middle-size businesses, this new trend will involve outsourcing services being provided by individuals.

Often these services will be associated with freelance services –that don’t require team engagement and can be done by a single professional.

In this segment, service providers and seekers will be in web design, web creation and maintenance, SEO, copywriting, editorial and translation services, online tutoring services, and marketing services.

In an increasingly fierce competitive scenario in outsourcing, vendors’ professional expertise will be valued more than any higher-value propositions.

A self-service oriented customer model is expected to become popular for the next two to three years. A predominant vendor selection criteria will be an organization’s ability to manage its internal processes and operations. This will translate into dealing with organizations that have certifications.

Companies in outsourcing who offer services integration will be in demand. More and more businesses will prefer to work with outsourcing companies that offer complete packages of outsourcing services like network monitoring.

This will prevent them from spreading different isolated business tasks to several offshoring companies. Thus, the prioritized companies will be those that can deliver all aspects of outsourced processes in one service package.

Web development is the simplest example. As a rule, IT outsourcing companies that specialize on web-sites creation also provide web-design services, maintenance and SEO for their clients.

In conclusion, economic downturn will provide great opportunities for outsourcing and offshoring vendors to trade savings for flexibility on how and when the work gets done. And service providers will become willing to work on a more performance-based model in order to mitigate risk for clients.