If the analysts at Gartner’s recent outsourcing and IT services summit in London are to be believed, the outsourcing industry is on the brink of radical change: new geographies are opening up, the pre-packaged processes on offer are becoming standardised and their creation ‘industrialised’; and the onus for managing many tiers of contracts and subcontracts is, in many cases, shifting to customers.
That latter trait is an important one. Multi-sourcing – hiring multiple providers to deliver different services – is, of course, nothing new: “Outsourcers have always subcontracted,” explains Derek Ward, the executive VP for UK markets from Atos Origin. “Now, however, the client and the provider have to do things differently. The responsibility for the contracts is either aggregated in the client themselves or in a prime contractor.” One such example is Atos Origin’s contract with the International Olympic Committee (IOC), where partners are directly contracted to the IOC but Atos Origin’s responsibility lies in managing them.
Historically, many customers have struggled with the management of their contract portfolio, striving to align contracts with changing business priorities and to extract the full value from them. So the prospect of becoming the aggregator of the contracts themselves will fill some with dread.
That is not something that would be particularly unwelcome at vendors. Says David Jordan, the VP in IBM Europe: “We are pretty happy to transfer risk we previously carried over to the client. Costs would, however, fall for the customer too because in the past we used to factor that risk in.”
Today the average number of IT service providers used by European companies sits at around four. But that is likely to rise as the breadth of choice of delivery model becomes an increasingly important part of the outsourcing equation.
Certainly, in terms of global delivery, organisations are looking well beyond India. Already some of the Indian IT service behemoths, such as Satyam and Tata Consultancy Services, are investing in locations as diverse as Hungary and Brazil in order to maintain low costs and satisfy customers’ more diverse cultural and language requirements. “In Europe the language is incredibly fragmented,” says Som Sarma, VP of Satyam Europe. “One reason to set up in somewhere like Budapest is that the populace will often be bilingual.
Eastern European locations are also proving to be more flexible in other ways. Gartner research VP Ian Marriott underlines how governments in these developing outsourcing locations are playing an important role: “They want to encourage foreign investment and create a business environment where individual providers can sell themselves. New EU countries, or those like Romania who are candidate countries, are proving popular for investment by service providers.
This expansion, especially of the Indian providers, is driven by the need to ride the demand curve of offshore services while keeping costs low. “European [IT services] companies might aim for 20% to 25% annual growth – at a push – but the Indians are working within the parameters of 150% growth as the minimum,” says Roger Cox at Gartner. Indian salaries increased by 25% in 2004 and 15% in 2005, but less mature countries, like for example, Vietnam, will have lower wages.
The establishment of this additional tier of service delivery will be welcomed by many customers, giving them a wider set of on-site, near-shore as well as offshore options.
Vendors, too, are seeking to take advantage of more flexible work regimes. Sarma explains that while an Indian work permit takes between nine and 12 weeks to process, and a UK permit four, processing times in countries like the Czech Republic and Hungary can be as little as a fortnight. “Currently a lot of our programme managers are working in Hungary,” he says.
The creation of a truly global footprint is evidence of the maturing of the outsourcing market: so too is the standardisation and industrialisation that analysts are seeing. When it comes to IT-enabled services, “there is a continual battle between standardisation and customisation,” says Cathy Tornbohm, a research director with Gartner. “The vendors want the former, because it reduces costs, but the customers are pushing for the latter.”
Although at present standardised business processes account for less than 5% of the total business process outsourcing (BPO) market, turning business processes into distinct services, provided on a pay-as-you-go utility basis, promises to cut costs for companies even further. Sarma, however, thinks that customer attitudes to global sourcing still have some maturing to do first.
Part of that maturing involves a shift in emphasis away from cost. Gartner’s Marriott describes how many organisations initially went into outsourcing with the hope of making processes ‘cheaper, faster, better’ – in that order. But progressively their priorities are shifting to become ‘better, faster, cheaper’. And that will only fuel greater demand for delivery models that are multi-tiered.