What's happened to outsourcing?

Have you noticed that there aren't as many press releases about new outsourcing contracts being signed these days?

Some people would argue that this is a sign that outsourcing was a fad that has run its course--I would disagree. The sourcing industry is going through some significant structural adjustments and my expectation is that it will emerge stronger than ever.

Business cost pressures and capacity and skill constraints just keep getting more severe while infrastructure and legal frameworks keep improving. At the same time, government interest has never been stronger--just look at the focus of governments in China and Malaysia for example.

So, what is happening then? A few key trends are becoming evident.

One trend is a strengthening of sourcing solutions to address a wide range of risk and control parameters, hence broadening the set of potential participants (or clients if you are a service provider). This covers not just shared service centers, captive centers and traditional outsourcing, but also build/ operate/ transfer models, "virtual" captive centers and hybrid models.

A second trend is towards shorter duration and hence lower TCV (total contract value) deals. Since 2002, the average contract duration for outsourcing deals (TCV greater than US$25 million) in the Asia-Pacific region has dropped from around 6.9 years for business process outsourcing (BPO) and 7.4 years for IT outsourcing (ITO) to around 5.6 years for each.

Finally, many original deals are now reaching their "expiry dates" and are being renegotiated, sometimes with the same service provider, sometimes with a new one.

So, it's not that activity or business is slowing, rather a lot of it is "under the radar screen". This is a sure sign of an industry that is maturing to become part of normal business operations.