2008 – And Beyond

Happy New Year. I’m adding my voice to the year-ahead punditry – but taking a different approach by looking further out. The views are based on a look through the end of 2010 and represent my own thinking as well as the input of several of my colleagues. I’ll be concentrating primarily on demand trends today, with more thoughts on provider trends in a later post.

With those parameters in mind, here are the top six issues to watch in services sourcing in the months ahead. We know these are already on the minds of many corporate executives.

1.   A desire to address the global dimension of the business strategy – i.e, the land of tomorrow’s customer:  More companies are talking about outsourcing and offshoring -- almost interchangeably -- as part of an overall globalization agenda.  Cost savings still matter, of course, but the desire to participate in emerging new economies is also gaining import.  This, in turn, is affecting the time horizon of the initiatives.

2.   A growing preference for selecting sourcing alternatives within the context of a multi-year strategic agenda. We’re already seeing fewer acts of desperation in the sourcing initiatives being launched. To many of us, this implies that the low-hanging fruit of labor-based sourcing has been harvested.  Companies are now looking for more partnership-minded relationships. (Yeah, many of the words are the same, but the contracting tactics differ).

3.   A push to evaluate sourcing options through the 3C paradigm; total value orientation. I’ll write more about the “3C Framework for Sourcing” in a coming post, but suffice to say it’s the balanced consideration of costs/capability/capacity.  The prior overemphasis on near-term cost reduction is giving way to a new equilibrium.  Providers that won under the former rules may not be positioned for the future orientation toward total value.

4.   Assessment of existing service delivery relationships for alignment with strategic direction – i.e., not a tactical move. Many of our clients tell us that they have awoken to find a veritable nest of service provider contracts existing within their companies. It seems that each business unit and corporate function has two to three different providers doing work for them. A serious rationalization is in the offing for the coming quarters, with a weeding out of the cost-only providers for those that align with the strategic direction of the client. This, of course, gives rise to …

5.   Considering outsourcing options for all technology-enabled, people-intensive work processes i.e, go big and fast. Looking hard at work and asking whether activities couldn’t benefit from scale and automation. We’re seeing wall-to-wall reviews of work processes and serious scrutiny of the efficiency of the delivery models. There is no slowdown in the consideration of sourcing alternatives.

6.  Looking at the role and value of captive offshore operations. Captive centers are showing great value, and we see expansion plans being deployed for those operations in the coming quarters.  While the make-versus-buy decision is complex, we’re sensing a continued desire to move knowledge-based work to locations that offer lower costs and greater capacity, with equal or better capability.  Look for a continued desire of some larger conglomerates to monetize their captive operations, but those will be a handful, at best.

Comments

[Mohit]

Peter

Great points.

On your second point about companies going more strategic on their sourcing strategy, do you see any of that change with certain sectors in the buyers economy getting hit the hardest by the financial crisis. Do you see financial firms believing offshoring is going to get them the immediate quarter by quarter saving and are making tactial moves to embrace offshoring more aggressively.

On your point 1 about companies looking to enter new markets do you see the sourcing strategy driven by the same folks who are looking at market entry into the new economies ? I have seen only a few companies where their sourcing strategy is alligned with their market entry strategy and are being run by different parts of the organization with minimal strategy overlap.

Best
Mohit
http://offshoreindianews.blogspot.com

[Peter Allen]

Mohit;

Good to hear from you! On your two questions ...

• Recessions drive demand for variable cost structures. The senior financial executives of companies that are most susceptible to contractions in consumer spending are highly motivated to reduce the fixed component of their costs. Historically, outsourcing has contributed a fair degree of enhanced variability to corporate costs, but companies will be looking to increase that variability as quickly as possible.

• Time to savings is a top priority. While the signs of recession have been prominent for many months, it is not uncommon for executives to be slow to act when faced with making significant and long-term structural changes to the delivery models for business support functions. Now that the declarations of a real and substantial slowdown in economic growth are being made quite commonly, companies will behave with a degree of focus to take action on their costs.

• Expansion of existing relationships possesses attractive alternatives. When faced with pressures to achieve results quickly, Clients will turn to their existing Service Provider relationships with an eye towards enlarging the scope of those contracts to address even greater proportion of the costs of operations. Established relationships and contracts will be considered as the primary source for outsourced services.

• Demand management becomes a core requirement. Corporate behaviors regarding the acquisition of services, and degrees of service complexity and variety, will be scrutinized. Service Providers will see increased volumes, but little appetite for new variants of services. Conversely, Service Providers will be looked upon to help maintain simplicity within the spectrum of service options.

As for the question on linkage between market entry strategists and service delivery strategists ... I agree with your point. Too often, the consideration of a service delveiry footprint is an after-thought in the market entry equation. We've seen a few enlightened Clients link the two earlier, but that is rare.

Best to you.

Peter