Basman | Explore: IT Outsourcing

More Contracts, Increased Outsourcing Adoption across Europe and Asia-Pacific, yet a Moderate Decline in Market Contract Values from 2005 to 2006

TPI, the world’s leading advisor to global corporations on all facets of their service-delivery strategies for business support operations, today announced the developments of 2006 in the global outsourcing industry through the TPI Index report. The contracts awarded in 2006 represented the single-greatest number of such agreements in any year, up 3 percent from 2005’s previous high. After an exceptional first quarter, the year concluded with a total contract value (TCV) of $78 billion, amounting to an 8 percent decline from the prior year. Annualized contract value (ACV) — an estimate of the average yearly revenue potential that may be derived from the 2006 contract awards — reflects roughly a 7 percent year-over-year decline in ACV.

”The 2006 numbers were down due in part to shorter contracts as well as those with smaller dollar values,” said Peter Allen, partner and managing director for Market Development at TPI. “However, the market is growing. The ACV signed for 2006 was the second strongest year ever for annual value coming online, and the industry also had a record year in contracts with annual average spend of $100 million. The year-over-year comparisons are down due to an exceptionally strong 2005, rather than a weak 2006.”

The number of “mega deals” — those with contract values above $1 billion – was unchanged from 2005 but off $5 billion in TCV from the prior year. Elsewhere, the total number of transactions completed as the result of a restructuring of a prior contract was a record at 72, but the TCV of just over $20 billion was not a record.

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Andrew Parker, vice president of Forrester Research and research director for the company’s EMEA IT services research team, and Tom Pohlmann, leads Forrester’s research into the economics and management of corporate IT, as well as the IT services market, are analyzing in a study the line between technology and service that will blur at a faster pace:

Market forces of commoditization, miniaturization, industrialization, and globalization, along with changing buyer sentiments, will accelerate a shift in the dominant form of IT delivery by 2012 — from buyers self-integrating technology to having it assembled and managed by outside providers. These four underlying drivers aren’t new, but their convergence will accelerate this market shift and make it stick: stable operations farmed out to third parties, new IP sourced from open communities and solution brokers, emerging technologies going to market wrapped in process bundles, and new software investments based on subscription rather than ownership. The resulting IT ecosystem structure will place those technology suppliers with the strongest delivery capabilities at the hubs. But in order to stay in the game, today’s vendors and service providers will need to overcome their own inertia around the development and management of IP, their rigid engagement models, and their dated partnering strategies.

Gartner released today 10 key predictions that showcase the trends and events that will change the nature of business and IT in 2007 and beyond.These predictions are for general technology areas rather than specific to industries or roles within an organization. The predictions are intended to compel high-tech companies and IT professionals within enterprises to action and position themselves to take advantage of the coming changes, and not be damaged by them.

“Selected from across our research areas as the most compelling and critical predictions, the trends and topics they address this year indicate that priorities, markets, cultures and technologies are all rapidly changing,” said Daryl Plummer, managing vice president and Gartner Fellow. “These changes will require that IT and business change their approach to delivering and quantifying value. IT professionals must examine these predictions for opportunities to increase their support of consumer-driven requirements and their ability to help the business deliver stronger services to those customers.”

This year’s predictions include:

Through 2009, market share for the top 10 IT outsourcers will decline to 40.0% (from 43.5% now), equaling a revenue shift of $5.4 billion. As market share declines, some key outsourcing vendors will cease to exist in their current named form. The reduced number of large contracts, increased amount of competition and reduction in contract sizes have placed great pressure on outsourcers, which will have to “sink or swim” based on support for selective outsourcing and disciplined multisourcing competencies.

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Look at the increasing number of posts that contain Outsourcing per day for the last 30 days in the international blogosphere:

“Outsourcing” and “offshoring” are already a part of our global industrial democracy and general increased awareness on the employment markets. “Outsourcing” and “offshoring” are a significant aspect of the globalization. They are chance and risk at the same time.

China plans to develop 10 outsourcing base cities by 2010. The global service outsourcing market stands at between $300 billion and $500 billion. The market is expected to reach $1 trillion in 2008. In 2005, China’s exports of service outsourcing were worth $900 million.

The Chinese government is to develop 10 outsourcing  base cities by 2010 in an effort to build up the country’s outsourcing services, said a senior official with the Ministry of Commerce (MOC).

Assistant Minister of Commerce Fu Ziying said the scheme would encourage 100 multinationals to shift offshore outsourcing services to China and foster 1,000 large and medium-sized service outsourcing enterprises.

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Over-the-counter debt and derivatives volume seen as key avenue for expansion for exchangesThe increased growth and profit pressures that come from going public combined with sweeping new regulations are rapidly transforming the world’s financial exchanges, according to a research report by Accenture.

The report is based on in-depth interviews with more than 50 senior executives at leading stock and derivatives exchanges, clearing and settlement institutions, and buy- and sell-side firms in Europe, North America and Asia.

According to the report, the percentage of the world’s stock market capitalization residing on publicly-held exchanges has grown by nearly a factor of eight in the past six years, from 8 percent in 2000 to 63 percent in 2006. The related transition of exchanges to public ownership with accountability to shareholders is forcing the industry to rapidly pursue new revenues and greater profitability.

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TPI, one of the most renowned international sourcing advisors, hits the nail on the head on global trends in sourcing:

• Increasing tendency toward multi-sourcing strategies, with multiple service providers engaged across a spectrum of business support functions and geographies
• Rapid adoption of global service delivery platforms, with attendant opportunities for flexible contracting relationships
• Shorter-duration contracting terms, reducing the risks associated with long-term agreements but also potentially restricting the upside
• Dramatic increase in service provider diversity, across service families, industries and geographies
• Gaining popularity of provider-defined solutions that contrast with historical models of provider-assumed assets and staff, with associated incremental improvements delivered over time
• Breakthrough potential of transformation in business operations made possible by focused investments and risk-taking on the part of the service provider community

Absolutely. That says everything happening right now in the industry. I would add four extra points to that list:

• Massive sellout of captives to service providers!
• Massive sellout of ITO units and field service forces to specialized service providers!
• Massive uptrade of the large global service providers into the BPO business
• The offshorers are coming! India and the other BRIC majors are entering the arena in the U.S. and West Europe!

Early this decade, many of the large companies that had enjoyed the benefits of early adoption of outsourcing aspects of their information technology (IT) departments began to look for new opportunities. Today’s sourcing operating models for essential corporate services, including functions beyond IT, are much more varied, dynamic — and more challenging.

Large enterprises are looking to optimize their business operations — including finance, procurement, accounting and even human resources — through the best combination of insourcing, offshoring, shared services and outsourcing, according to TPI, a leading sourcing advisory firm that today is relaunching its brand to reflect its evolvement along with that of the overall marketplace.

“The strategies that have emerged are powerful – for the adopting organization and the marketplace,” says Peter Allen, partner and managing director for Market Development at TPI. “Organizations across all industries are compelled to realign the services that make business more productive, taking advantage of the best practices, third-party expertise and emerging geographies, all of which are defining the future business environment.”

The stakes are high for everyone. While recent studies suggest that the largest companies as a group stand to save billions of dollars from sourcing solutions over the course of the next decade, sourcing has become much more than just a cost-saving tool. It has become a force for true corporate change. It has also come to represent multi-faceted portfolios of delivery resources.

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Forrester Research reports trends in current deals:

With 65 deals closed and approximately €5 billion spent on IT services in EMEA, Q2 2006 greatly resembled Q2 2005. But closer inspection shows that these two points of comparison are the only real parallels between the two quarters. The balance of contracts by service type has shifted hugely, and Q2 2006 shows a different picture concerning the vertical markets as well. Firms in the consumer products segment have come from nowhere last year to top the list with 16% of all deals this time, while the established sectors saw a drop in their share of deals. The same is true for the distribution of deals by country: UK firms lost significant ground in comparison with last year, while German and French firms were more active. Vendor success wasn’t striking; this quarter; we only found one megadeal — CSC’s deal with BAE Systems. As noted in previous quarters, EDS had the most deals.

BBC reports from a conference in the city of Hyderabad, that India faces a shortfall of half a million skilled workers by 2010:

Nasscom President Kiran Karnik told the conference that the availability of skilled engineers would be the biggest challenge for industry in the years to come.

He said the IT industry in India needed something like 350,000 engineers per annum, but no more than 150,000 of the most highly-skilled engineers were available each year.

This was creating severe shortages of talent, Mr Karnik said, and the industry was definitely concerned.

At present, the IT and Business Process Outsourcing (BPO) industries in India employ 1.3 million people. This year India’s software exports are expected to reach $30bn while the domestic software business is likely to be worth $7-8bn.

Kai Peters and Narendra Laljani, Ashridge Business School, and Sridhar Vedala, Morgan Chambers have published a very interesting article in the European Business Forum about India’s capabilities as an offshore nation:

 India’s offshoring sector has been driven by cheap labour and a competitive culture. But as the country’s low-cost advantage diminishes, Indian firms will need to find innovative ways to stay ahead of new emerging economies.

With an annual economic growth rate of around seven to eight per cent, India has emerged as a future economic superpower. But is the country’s impressive growth down to lower costs alone? Once India’s cost advantage diminishes, will future growth shift to companies in other low-cost economies? We believe that cheap labour is the beginning, not the end. While a cost advantage is the key driver in low-end manufacturing or in basic levels of outsourcing, innovative organisations in India are now reaching beyond these markets and are focusing on more sophisticated products and services. One of the best examples of this transformation is the country’s offshore outsourcing sector.

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Worldwide Posts that contain Outsourcing per day for the last 30 days.

Just have a look at the bottom of my sidebar at your right-hand side! It shows how many times in the last 30 days the term “Outsourcing” is mentioned in the entire blogosphere. This will show you up-to-date how intense the worldwide discussion about outsourcing is.

At the same time I replaced now also my tag “IT Outsourcing” (which you always see at the bottom of each post) with “Outsourcing” just to be more aligned with most of the bloggers in Technorati … This will probably take a while until all my postings will be found under the new tag in Technorati.

Overall Asia Pacific BPO market growth to slow to 9 percent in 2006

Human resources business process outsourcing (HR BPO) now represents the biggest component of the overall BPO market in Asia Pacific, according to Gartner, Inc.

Payroll services, benefits administration and training and development are the most common HR activities outsourced in the region. The Asia Pacific (excluding Japan) HR BPO market is expected to reach US$1.3 billion in 2006, representing 24.7 percent of the total BPO market and an increase of 9 percent from US$1.2 billion in 2005.

The overall BPO market in Asia Pacific is expected to reach US$5.4 billion in 2006, an increase of 13.5 percent over 2005. Australia experienced growth rates higher than the Asia Pacific average for HR BPO, at 10 percent from 2005 to 2006. The total BPO market in Australia will expand from A$779 million in 2005 to A$855 million in 2006.

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Good question, William Martorelli. The principal analyst at Forrester with more than 15 years of experience in IT technology and business consulting and with research responsibility for subjects including outsourcing, global sourcing strategies, utility-based services, managed services, business process outsourcing, application hosting, and Web hosting gives us his answer:

With significant growth in both customer interest and vendor revenues, offshore business process outsourcing (BPO) is of increasing interest to commercial enterprises, particularly those that have outsourced offshore successfully before in other domains. But what makes for a good candidate process? At the end of the day, any process performed successfully on a remote basis or in a shared services context can be outsourced successfully and any such process can be outsourced offshore depending on audit and compliance constraints. Nevertheless, the characteristics of some processes lend themselves to offshore outsourcing more readily than others, particularly as an initial thrust into offshore. These characteristics include not only factors that are true across most outsourcing domains, but also factors more directly relevant to the offshore BPO value proposition.

Sonoko Takahashi, a Forrester researcher based in Amsterdam and focussed on European IT outsourcing deals, has published the the first document in the “European IT Outsourcing Deals” series. She found out that outsourcing maturity surfaces through BPO and single-service contracts:

During the nine-quarter survey period, UK firms signed 226 large outsourcing deals, making the UK the most flourishing outsourcing market in Europe. In addition to mainstream services like desktop outsourcing or data center outsourcing, application management and business process outsourcing are increasingly in demand. The average contract length was 5.5 years, and most deals had a value of between €20 and €100 million. Government and public-sector agencies drove the greater part of UK megadeal activity during the period, while the commercial sector was far less active with these very large contracts. Demand for industry-specific offerings is increasing. In response, service providers must continue their push for more industry-oriented sales and marketing messaging and tactics.