The tough economy has affected the outsourcing industry, along with every other industry out there.
When Ann All wrote about outsourcing trends, citing information from IT services company CSC, she found the trends largely involved buyers deriving more value for their money. Instead of the traditional tactic of trying to negotiate the lowest possible prices, however, buyers are relying on more sophisticated techniques such as outcome-based pricing.
Ann spoke to several other sources, including Unisys, TPI, Everest Group and Compass Management Consulting, to get their takes on top outsourcing trends for the next year. They offered additional insights on the increased value theme, including buyers asking their suppliers for help in targeting internal inefficiencies and developing ideas for improvement.
Click through to learn more about 12 key trends currently shaping the outsourcing industry.
Outsourcing clients are increasingly looking for more vertical expertise from their suppliers, says Anirban Dutta, director of Global Strategic Business Development at IT services company CSC. ‘The vertical integration among infrastructure, applications and operations will ensure efficiency, accountability and alignment between business strategies and enabling services,’ he says.
Thanks to emerging technologies like cloud computing, service providers will offer more outcome-based pricing rather than simply equating more FTEs (full-time equivalents) with more work. Customers are interested in fully managed services or variations of managed services with outcome-based service level agreements (SLAs), says Anirban Dutta, director of Global Strategic Business Development at IT services company CSC.
Procurement organizations will begin taking a more active role in purchasing decisions, vendor selection and other activities, says Anirban Dutta, director of Global Strategic Business Development at IT services company CSC. This will lead to more large renegotiations of existing IT service deals with customers. Niche companies like Savings Corporation of America, which negotiates energy, supply chain and telephony rates, are now partnering with third-party advisors to provide a one-stop shop for large customer initiatives.
Both buyers and suppliers are showing interest in managed services, says Ross Tisnovsky, VP of research for global consulting company Everest. While the right application of this model shows multiple benefits, challenges can include setup complexity, volume uncertainty, impact on different IT functions and organizational change requirements. Buyers must also contend with risks inherent in the move to managed services, such as potential cost escalation in situations where volume is uncertain and demand trends unknown.
Ross Tisnovsky, VP of research for global consulting company Everest, says with labor arbitrage fully mature, companies are seeking different solutions. In the applications outsourcing (AO) market, providers are experimenting with new models including risk-shared partnerships and industry-specific AO solutions. In infrastructure outsourcing (IO), it’s leading to a ‘crisis of genre’ for offshore suppliers. As they mature and reach critical size, they begin going after the same clients as multinational suppliers. This forces them to shift to traditional rules of IO, deviating from the innovations they brought to the IO marketplace.
A Unisys poll of 532 enterprise information workers showed 36 percent preferred to bring their own PCs to work. That trend will grow in 2010 and 2011, encompassing smartphones and other devices too.Increasingly, organizations will provide a ‘digital allowance’-a subsidy that enables participating employees to purchase their own productivity devices for business use, predicts Brian Ott, VP of Unisys Global Outsourcing and Infrastructure Services. Outsourcing partners will need to manage the allowances and support different types of devices.
Most outsourcing clients are confident that pricing for infrastructure services is competitive for year one and year two of an agreement. Historically, however, pricing adjustments over the life of a contract don’t keep pace with the competitiveness of the market. So more organizations are considering techniques to ensure competitive pricing over the life of their agreements, says Bob Mathers, principal consultant, Compass Management Consulting. Such techniques include predefined unit price declines, mandated benchmarks on a regular basis to check pricing, and price adjustments based on specific price indexes.
Traditionally, service providers have been responsible for efficiency and cost reduction. Increasingly, clients are asking their providers to also identify inefficiencies within the client organization’s internal environment that contribute to high costs, and how those inefficiencies can be addressed. Service providers are being given more leeway to find savings and improvement opportunities within the client operation, says Bill Fowler, principal consultant, Compass Management Consulting.
Restructurings, in which clients renewed, renegotiated or expanded existing contracts, accounted for almost half of the total contract value (TCV) for IT outsourcing in 2010’s first quarter, according to TPI’s just-released Index of the Outsourcing Industry. Three mega-deal restructurings alone accounted for almost one-third of TCV. New ITO contract value was essentially flat compared to the same period last year at about $9 billion. With more contracts coming up for renewal, TPI analysts expect restructuring will continue to play an important role for the remainder of this year.
According to TPI’s Index of the Outsourcing Industry, IT outsourcing (ITO) values were strong in the first Quarter of 2010, with $16 billion in ITO contract awards representing a 46% increase in total contract value when compared to Q1 2009. The BPO market, in contrast, was down 26% compared to the year-earlier quarter. TPI analysts believe outsourcing customers will continue to rely on ITO more than BPO this year.
TPI analysts say outsourcing clients are leaving the bulk of their original scope with incumbent service providers. Increasingly, though, they are splitting up portions of the original scope and awarding it to other service providers in a best-of-breed approach.This is especially true in large IT outsourcing restructurings, specifically in the applications, desktop and network services areas. Incumbents working under renegotiated agreements may have to share clients with competitors, say the analysts.
While there is a lot of discussion and hype around cloud computing, say the TPI analysts, there is more planning for potential cloud computing opportunities rather than actual cloud computing execution built into contracts right now.
