Outsourcing Predictions for 2009

Outsourcing Predictions for 2009

Summary: It's going to be a pivotal year in the global IT and BPO services business as companies seek to get more for less with their budgets. How will this impact the world of global services delivery and outsourcing?

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Ingsoc It's going to be a pivotal year in the global IT and BPO services business as companies seek to get more for less with their budgets.  How will this impact the world of global services delivery and outsourcing?

Low-hanging fruit outsourcing with immediate cost-savings will be strong.  As we discussed and surveyed here, it's areas where enterprises can streamline initial costs over a contract and get an immediate impact on the bottom-line.  That's bread-and-butter application outsourcing, high-arbitrage BPO areas such as Finance & Accounting  and vertical-specific analytics (that KPO stuff).  I am also expecting increased adoption of procurement BPO models as increased procurement and supply management work is moved offshore, and buyers can benefit from labor arbitrage to underpin the transformation costs that have held back adoption in the past. 

Many initiatives which require incremental upfront investment that cannot be tied directly to revenue-metrics will suffer.  The back-end of Q1, Q2 and Q3 2009 will be busy times for outsourcing deal activity.

The onshore/offshore decision-process is reversed to "why should this stay onshore?"  The traditional evaluation methodology for companies' outsourcing and offshoring opportunities is fast-changing.  Rather than companies determining which processes can be carried out from a remote location, most will be determining why processes need to be carried out onshore

Services firms will be forced to consolidate.  With deals getting smaller and more plentiful, combined with renewed pressure on services firms to hold-back on hiring, the need for added global scale and staff resources, process and technology expertise, are going to drive consolidation at a much more aggressive pace than we saw in 2008.  Most outsourcing service providers are currently waiting out the year to get a firm picture on how to address their go-to-market strategies after the New year.  I predict these to take several forms:

  • Large service vendors going for a pure scale-play.  Like HP/EDS, we will see more mega-mergers to ramp up into that "mega IT-BPO" provider bracket.  The "big 3" could pull away from the rest of the market for some mega-deals and we will likely see other service providers combine to challenge. 
  • Offshore captive cherry-picking.  There are some high-quality captives that are ripe for acquisition, that can give providers immediate entry into new industries, or consolidation in existing ones.  In many cases, it is more appealing for service providers to invest in buying up clients than each other, but further devaluations in the stock prices of many service providers will create tough investment decisions for ambitious providers.
  • Increased blending of IT-BPO offerings will drive vendor acquisitions.  In many situations today, BPO is becoming a natural extension of an ITO relationship.  This is especially the case where the service provider is willing to take on industry-specific processes that augment the IT services, for example supply chain merchandising with retailers, or check-and-lockbox services in financial services.  There are simply not going to be "world-class" captives for sale to fulfill every industry need, which is going to force many providers to seek mergers.  I anticipate some strategic acquisitionsbetween BPO-centric and IT-centric vendors.  Those that choose to remain as pure-IT, or pure-BPO will get forced into the middle-market to scrap for smaller engagements.

Global HR strategies are moving to the top of the agenda.  As we have discussed-to-death on this blog, one of the most redeeming facets of outsourcing is to become more competitive globally, to use a service provider's skills and resources to enter new markets, or divest from others.  One area of note has been the increase in firms moving onto global HR models where they have a much more integrated view of their global organization and can make much faster, more informed, decisions about their business and their workforce.  The recent revival in global payroll and HR-IT outsourced services is testament to this growing need for firms to globalize their workforce data.

Survival of the fittest.  Let's not beat around the bush here... we're in for a very tough economy, budgets are being cut across the board and companies won't be increasing their spending on IT and business operations.  They are going to use outsourcing as a vehicle to save money, and - hopefully - increase their competitiveness.  So, while we can expect to see increased spending on lower-cost services with a strong offshore element, we are already seeing many areas of planned spending put on hold - for example, costly software upgrades, or business transformation initiatives. Hence, the competition for the outsourcing dollars is going to be increasingly intense as revenue opportunities for services firms are already drying up in other services markets.  Many of the smaller service providers, which are more focused on staff-augmentation delivery and discretionary projects, are going to struggle. 

At the same time, it's a great opportunity for the well-resourced providers to edge out smaller low-cost competitors and increase market share as they use this tough market to their advantage.  Shaving small portions of cost isn't going to make a huge difference to many firms - they will have to make bold and radical decisions to survive.

Topics: CXO, Data Centers, Enterprise Software, Outsourcing

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6 comments
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  • Well, if America crashes the rest of the world will follow suit.

    We've seen other markets fall in response to America dropping.

    As for "survival of the fittest", what's the description/meaning to that buzzword? What is "fit"? And would Jesus approve of the tactics used?
    HypnoToad
  • RE: Outsourcing Predictions for 2009

    Every large company I have consulted for brings in a ton of H1B visas. Sooner or later the average American is going to figure out this is the same thing as hiring illegals. Basically income taxes are not paid and the money is wired overseas. Companies outsource so they don't have to pay any benefits. I would suspect with the American economy going downhill, outsourcing will go down. Americans will demand the government stop giving tax breaks to companies who outsource. The argument that Americans won't do the work is bs. The real argument is that Americans won't do the work for $2.50 / hour. I suspect Obama will put a lid on outsourcing and encourage American companies to hire Americans. If not, take away their tax breaks and let them fail.
    mossimo97
    • RE: Outsourcing Predictions for 2009

      1) /*/ Every large company I have consulted for brings in a ton of H1B visas. /*/ - TRUE (I guess they are doing this coz they dont find rite ppl in US, and US is a country of NO MANS LAND, US is a country which has all its roots from Immigrants and do you know how much pain it is for a person to come USA in regarding the effort , the consulate interview process.... Its not like an employer file an application and the employee gets his VISA in mail)
      2) /*/ Sooner or later the average American is going to figure out this is the same thing as hiring illegals. /*/ - FALSE (Remember, America is a no mans land, Yes you are rite an Average American can think hiring Aliens is same like illegal.. But if they realize the basics on what America is really built on , they should be happy that they are living in America and dont have to take the pain immigrants are facing.)
      /*/Basically income taxes are not paid and the money is wired overseas/*/ False ( Do you know what, in America you need to pay income tax on every Dollar you earn, I really dont get how you justify this statement. Dont they pay for Rent, Food, Gas, Clothes, Gifts they buy when they visit their home country, Car,etc... Yes they wire money overseas but after they spend enough money for their needs to live in America and also after they pay their taxes.)
      I would like to compare this with one example-> Ban Toyota, Honda which are all Foreign Automakers and keep only GM, Ford and Chrysler coz Toyota and Honda wire profits back to their Country... LOLZZZZ. I really feel you miss the basics on what America is built on)

      hey actually I wanted to contradict each and every line in ur response but I dont want to do that.

      Tell me one simple thing... Why American Economy is down now ? is it Outsourcing ? grow up dude, plz do spend some quality time on ur basics.

      PS: I tooo dont encourage outsourcing, but I am not worried about outsourcing, coz I try to be better than a H1b guy. Dont you know Americans and American Companies are living on Credit Cards and Loans that they get from Banks. Are Americans any different from Madoff ?? Americans take money from one creditcard company and pay the other and thats how they live. (ofcourse I am not saying all Americans are like this, but considerable percentage of people.)
      HellRazor909
    • There are no tax breaks for companies that offshore

      There are no tax breaks for companies that outsource offshore.

      It's an urban legend that has persisted after Barack Obama said the following in a campaign speech:

      ?We can keep giving tax breaks to companies that ship jobs overseas, or we can give tax benefits to companies that invest right here in New Hampshire.?

      (1) It was a campaign speech. Therefore it needed no basis in reality, nor is there any obligation to deliver on the comment. It was fiction, intended to arouse patriotic passions among the senior citizens that make up the audience at campaign speeches.

      (2) Since American people (as a sweeping generalization) no longer seem to think that fact, truth, and insightful thought are necessary prior to spouting off in blogs, emails, and water-cooler conversations, this nifty little untruth has managed to live a peculiarly long time, getting passed along as fact even by reputable publishers these days. (Do newspapers and online publishers employ fact-checkers any more? I think not.) Maybe if you compare it to some very infamous untrue urban legends like "Audis had a problem that caused them to slip into gear and accelerate unexpectedly" and "The Constitution guarantees me the right to privacy", this one isn't so huge, but it is equally as false despite being almost universally believed to be true.

      "Americans will demand the government stop giving tax breaks to companies who outsource"? Yes, I suppose they will, being ignorant Americans after all. But it won't matter, and it won't even require a vote. There are no Federal tax breaks for for companies who outsource, and never have been.
      don.montgomery@...
      • All companies got tax breaks

        In 2001, all companies got tax breaks whether they outsourced or not. This means the same thing as 'companies who outsource got tax breaks'. We are the only company in the world that encourages its companies to not hire its own citizens. This is the same thing as importing foreign oil, hiring illegals, etc.

        Importing foreign oil - foreign companies don't pay US taxes

        Outsourced workers overseas - don't pay US taxes

        Illegals - don't pay US taxes

        People wonder why we now have a 10 trillion dollar debt. People wonder why we have a huge trade deficit. People wonder where all the jobs have gone. Our own government encourages its companies to not hire Americans. This is the stupidest thing I have ever heard of. Sooner or later America's credit card will be cut off and the tax paying Americans will get stuck with the bill. What a brilliant idea it was to outsource everything. Brilliant dude, really. Go take an economics class.
        mossimo97
  • RE: Outsourcing Predictions for 2009

    I think there will be more lay-offs and much more cost cuttings from all companies in the first half of the year.Expecting good results at least from last quarter of the year.

    Sai People
    www.saipeople.com
    saipeople