Out with the old and in with the new — well, almost! We do see ‘retro’ back in fashion in some areas of the outsourcing market when looking ahead to 2012. What follows are nine key trends that CIOs can expect in the coming year in terms of outsourcing and global services.
1. Demand outlook is bright, with some points to consider.
Demand will weaken initially, but then should improve by mid-year. The inhibiting factors and pain points will be:
– Continued tight budgets.
– Minimal discretionary spending, with approvals requiring rigorous ROI explanations. The majority of investments will need to show positive ROI within the fiscal year and, as a result, lead times and planning cycles will be short.
– Most IT budgets will be approved on a rolling monthly or quarterly basis.
– Systems integration, led by standardization and migration to common global processes, will lead growth. Simplify remains the buzzword for CIOs.
– Cloud computing offerings will stimulate greater demand for infrastructure outsourcing. Outsourcing providers, therefore, will revamp the architecture of their product offerings to fit the modular needs of a cloud environment. As a result, buyers moving to the cloud will create a big demand for redesigning software architecture, and also for quality assurance and testing services.
– The ROI of business process outsourcing will continue to be challenged. As providers support clients in this sourcing area, we see a lack of domain skills on their teams hindering deals.
– Outsourcing by midmarket companies will be on the rise, with much attention paid to platform-based, bundled outsourcing and transaction-based pricing. Typical examples are payroll and hosting services.
2. Operating models are going retro.
There are some contradictions affecting the market. On the one hand, clients frustrated with suppliers’ rising costs, governance challenges and uneven performance are exploring in-sourcing more often. At the same time, continued hiring and attrition challenges at global businesses, and overall governance requirements, will accelerate buyers’ move to managed services models. This will need to shake out over the year.
3. Professionalization of outsourcing will increase.
Supplier management and governance challenges will also spur the need for professionally trained managers. Programs such as the Certified Outsourcing Professional (COP) from the International Association of Outsourcing Professionals (IAOP), and training workshops will be leveraged more often.
Additionally, customers will increasingly see clear differences among suppliers in the services sector versus other outsourced product categories. As a result, high-quality procurement managers will be in greater demand.
4. M&A will continue, but yield few benefits.
Small acquisitions, focused on specific domain knowledge, will continue among suppliers. The gap between high-end Tier 1 and smaller Tier 2 providers is wide — now including billion-dollar firms that have yet to stake a lead claim in their category; they need clearer differentiation.
Some niche, or Tier 2 players, will continue to prosper, but focus is key to their success. There are no clear leaders in this category yet, and CIOs need to ensure that detailed due diligence is done when selecting a Tier 2 partner. Assess whether there’s a good fit when it comes to your future plans and their investments.
5. Pricing is expected to be flat in spite of many upward pressures.
Continued pressure on suppliers will lead to flat — but not lower — pricing compared to 2010/11 levels. Moreover, weak exchange rates and the weakness of the U.S. dollar will put increased pressure on suppliers. This could be the time for businesses to get good deals on contract terms. Increasingly, outsourcing will move away from staff augmentation/time and materials toward output-based pricing and managed services.
6. Hiring and utilization will strengthen.
Expect to see more new-graduate hiring by suppliers as a result of market growth and the need to reduce costs. The better firms will continue to operate with staff utilization in the high 70 to low 80 percent rates. In addition, hiring in newer geographies — such as Brazil, China, Colombia Mexico and Poland — will divert some attention away from India.
7. Wages will rise, creating greater pressure on margins.
Higher inflation is causing wages to rise 10 to 15 percent in India and many other Asia/ Pacific locations, while the U.S. and Western Europe will see much smaller raises. Latin American wages will rise more than 8 percent.
8. Proactive risk management is important to the continued growth of the outsourcing industry.
More attention will be paid to the diversity of one’s geographic portfolio, and there will be greater concern with monitoring risk and compliance in case of disruption at supply locations.
9. Rising geographies will take market share away from traditional locations, but the overall pie is growing.
Eastern Europe and Central and South America are surging, and buyers will increasingly draw on suppliers’ global delivery models to provide time-zone coverage and to realize true 24x7x365 support. Offshore players will also continue to expand and/or set up operations in new geographies such as Brazil, China, Colombia, Mexico and Poland.
In conclusion, expect something new, something old and something borrowed in global services and outsourcing as we head into 2012. But most importantly, expect frequent change and avoid going long on risk.