HOME | ABOUT US | CONSULTING | RESEARCH INSTITUTE | JOURNAL | EUROPE | PAPERS | SUPPLIERS | FOCUS AREAS | EVENTS | NEWS | CONTACT US

Current Stories
More Stories
More Forecast Stories

New Fluid IT Architecture -- How It Works and Why It Matters to Your Organization

2008 Market Predictions: FAO, Global Sourcing, HRO, ITO, and PO Markets

Comparison of Outsourced and Captive Solutions for Capturing Value from Offshoring

Trend Report: Challenges in Adopting Service-Oriented Architecture

Global Sourcing Market Update: Indian Captive Market: Trends and Implications

Improving Merger Success through Outsourcing

Financial Accounting Outsourcing (FAO) Annual Report - January 2007

IT Outsourcing in the Small and Medium Businesses

Stakeholders in the outsourcing market have a huge opportunity and many challenges ahead of them now because the outsourcing market is undergoing significant changes. This fundamental restructuring will have a direct bearing on the way buyers and suppliers structure deals.

These changes are especially significant in light of the major renewal event. The Everest Research Institute estimates $118 billion will be up for renewal between 2006 and 2008. As of this month, buyers and suppliers have already renewed $30 billion of that total.

At the same time, a significant number of new deals will be created as a result of market expansion. These, too, will not remain immune to the changes. Taken together, it is likely that the restructured deals along with the new ones will leave behind a landscape significantly different in its shape and texture from the landscape today.

The Everest Research Institute analyzed the market forces that would impact the upcoming renewal event in its July 2006 Global Sourcing Market Update report. It also discusses the implications for buyers and suppliers as a result of this restructuring. This article shares the key findings of this update.

Key Trends Affecting the Outsourcing Market

The key trends that will bring about the far-reaching changes in the outsourcing market are:

• The continuing rampant growth and penetration of the global sourcing model
• The different bundling of functions from the current norm
• The integration of process and technology as the next way to create outsourcing value
• The proliferation of both suppliers and feasible offshore locations

Trend 1: Rampant Growth of Global Sourcing

While the adoption rate of global sourcing has been consistently high over the last few years, careful analysis shows that even in the most mature offshoring market--applications development and maintenance (ADM)--the penetration of the global sourcing model is still very low. Offshore ADM today still accounts for only about four percent of the total global IT services spend and about ten percent of the full-time employees (FTEs) providing IT services across the globe.

This penetration is poised to expand dramatically, not just across ADM, but also across BPO areas and IT infrastructure. We believe that ADM will continue to grow at over 30 percent annually for the next few years, while BPO will likely see a 40 percent+ growth, and remote infrastructure management services will explode with a 50-70 percent annual growth.

Trend 2: Different Bundling of Functions

The outsourcing market is also fundamentally undergoing a change. Suppliers and buyers are increasingly bundling multiple BPO processes within a function and then outsourcing them together. In addition, bundling IT components with BPO is also increasing rapidly, especially in finance and accounting outsourcing (FAO) and industry-specific processes.

We estimate that the multi-process or full-service BPO market, which had an eight percent share of the total BPO market in 2004, will grow much faster than single-process BPO and will account for at least 25 percent of the market by 2010.

While the marketplace is bundling BPO processes, the reverse is true for IT outsourcing deals. The mega-deal era is clearly coming to an end, as applications start getting bundled with either the overlying business functions or the underlying infrastructure or both. Overall, we believe that the future value of bundling will be around towers such as finance and accounting.

Trend 3: Process-Technology Integration

While technology bundling within functional outsourcing is becoming a well-accepted norm, a new trend is also beginning to emerge that could become a source of value even bigger than offshoring. This nascent trend focuses on the tight integration of technology and processes, allowing for significantly lower technology and process costs by virtue of best practices and implementation.

Integrating technology across a specific process allows suppliers to cater to several clients with similar requirements. The recent development of language-, platform-, and industry-agnostic solutions has given a head start to process-technology integration.

One of Everest's insurance industry deals provides a good example. The deal, which focused on specific processes, attracted bids from a number of suppliers including some traditional majors and a niche insurance industry supplier. Much to everybody's surprise, the niche supplier's bid was 50 percent lower than the others, despite almost no offshore leverage, compared to others that were proposing high levels of offshoring.

When Everest analyzed the cost structures in detail, we discovered that the key difference lay in technology costs, which the niche supplier had managed to bring down to almost zero, thanks to huge leverage across all its clients. Further adoption of best-of-breed processes allowed it to reduce its process costs fairly significantly too, which helped halve the overall costs.

Trend 4: Supplier and Location Proliferation

The number of suppliers in the outsourcing market has grown tremendously and will continue to grow, albeit slower, in the near future. There are already more than 5,000 suppliers globally and more than 3,500 suppliers in India alone. While the rate of growth is going down, and early signs of consolidation and imminent shake-outs are visible, the growth of offshore will ensure that the numbers will continue to scale in the near future.

Another trend, which is much earlier in its maturity stage but gaining ground more rapidly, is the growth of offshore locations. While there were only about 20 cities on our radar two years ago, we now track over 50 cities in great depth. Further, we have discovered offshore delivery centers in more than 125 cities today, and that number continues to grow at a very rapid pace.

Implications for buyers and suppliers

Buyers have a lot more options today in choice of suppliers and locations for offshoring than they had just two years ago. With more choice, comes more complexity; buyers have to understand the potential evolution of the market so that they are not forced to accept deals on terms that might become unfavorable to them in the future. Leveraging the right combination of suppliers, locations, delivery models, and technologies could result in significant savings and a margin improvement for buyers.

Suppliers are also at high risk as the models change and the number of suppliers increase. As competition grows amongst suppliers and the market changes, we will see many losers and a few winners. Suppliers should focus on aligning their service offerings with the new trends in the market to prevail amidst heavy competition.

Lessons from the Outsourcing Journal:

• The outsourcing market will witness a major contract renewal event worth an estimated $118 billion between 2006 and 2008. Buyers have already renewed $30 billion.
• The renewal event will fundamentally change the outsourcing market due to four key factors:
  • Global sourcing will see rampant growth across all outsourcing areas
  • Functions will get bundled differently, unlocking additional value from outsourcing
  • Process-technology integration will gain ground rapidly by allowing for significant cost reduction
  • Outsourcing locations and suppliers will proliferate, creating huge risks and opportunities
• The completion of the renewal event will see a different set of advantaged buyers and winning suppliers (and many disadvantaged buyers and losing suppliers!)

Publish Date: September 2006

For more information...
Printer friendly...

Copyright © 2006 - Everest Partners, L.P.

[Previous Story] [Next Story]

ADS