What outsourcing trends can we expect to see in 2012? Robert Morgan, director of outsourcing advisory firm Burnt Oak Partners, discusses global trends.
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Indian providers will start winning large-scale central governmental work in 2012 - effectively for the first time. Politically, this will be very difficult but it will send the message that there are no sacred cows anymore. This will be balanced by new EU and US models leveling the battleground and competing head-on with offshore pricing with “on-shore” experience and expertise. This will be most noticeable in complex customer service centre technology and support.
The global downturn will increase the number of new deals done in 2012-2013 as clients find they cannot put decisions off any longer. This will extend to renewing existing contracts too. A record number of existing accounts will change hands as contracts come up for reletting. This phenomenon is unusual for outsourcing clients. Suppliers usually feel recompleting is mostly done for benchmarking purposes and take it for granted the account will not change from the incumbent.
Outsourcing is changing and not without consequence. Large deals have all but disappeared and deals now being signed are smaller, shorter and less complex than three years ago. Yet when viewing the service providers’ published annual or interim results, turnover ranges from mediocre, (which, given the state of the world’s economy, is not bad), to the rip-roaringly excellent.
Stranger still, solid gross margins are still being achieved. A typical example would be Infosys, which achieved year-on-year growth of only 15.7% (most analysts predicted and expected 20% or greater growth), but a gross profit margin of 41.29%. IBM’s fourth quarter and year-end 2010 results show a gross margin of 49%, and current gross margins are 46.54%. Accenture’s fourth quarter, ended 31st August 2011, with an operating margin of 33.1%. Even a sleepy, under-capitalised provider such as Unisys reported a third-quarter 2011 gross profit margin of 27.9%. Clients had grown used to single digit profits from traditional service providers, so this truly illustrates why clients need to understand the causes of and why outsourcing is changing.
Outsourcing has and continues to adapt and morph as it responds to client and economic demands. However, extending, amending or undertaking new deals no longer needs true executive sign-off. Usually it sits squarely in middle management and even procurement control. Today’s shorter contracts seldom contain major capital expenditure requirements, which was previously a major reason to use players with deep pockets. However, even tier-one suppliers adapt fast and have learned that, in a bidding situation, they do not need to fully compensate for their scale and leverage advantages in a cut-throat way. Higher margins, up to double, are back.
The cost of sale for securing smaller deals is of course much higher proportionally, but this is now easily affordable. But surely sourcing services from the market is all about lower cost? Clients must now face up to the new world of “convenience sourcing” – you will not get best pricing for small parcels of work. Neither will you get real risk carrying for smaller work parcels, nor innovation beyond new technical whizz-bangs – clients no longer have the buying power they once did.
What are the other consequences of today’s appetite for convenience sourcing? Firstly and most importantly, poorer contracts – most without specialist legal or other advice – lead to reduced, unenforceable or non-existent contractual obligations and supplier liabilities. Typical examples from the market today include:
- Lack of measures and remedies for poor performance;
- Mediocre attention to data protection. Daya protection is often given secondary consideration, but it is critical to prevent potential litigation and even reputational damage if it is handled badly;
- Poorly defined exit responsibilities. This is a time bomb of hidden costs and major future managerial distraction.
Additionally, people and assets are no longer wanted by the supplier – leaving the problem squarely with the client.
For middle management, convenience sourcing absolutely solves very real issues by providing expert services under the client’s control, with only a minimum commitment. The short-term nature of convenience sourcing allows for “plug and play” replacement services where necessary. This convenience represents a double success for larger suppliers. They achieve higher margins with deals of little or no impact on their balance sheet, as they do not take on people, assets or risk profiles. No wonder suppliers are unconcerned by the lack of large deals. So are today’s outsourced clients still capable of securing a good flexible deal? Yes. But will they secure the best commercial deal, with a risk-bearing and innovative partner? Without support, the evidence suggests otherwise.
- Other trends or issues in outsourcing in 2012 will include new market entrants in the form of specialists – say in supply logistics – who will come to market with solutions with all the software fully developed and integral to their solution packages. This decreases time to market, business risks, costs and the convenience of proven software with little or no transformation needed.
- We will see the failure of a major supplier with a large European portfolio and the scaling back of a smaller global player, as well. We will see supplier consolidation, but at the same time, an expansion of new market entrants.
- And finally, UK government will introduce a new equity ownership model for shared services and large outsourcing deals which will become replicable in the private sector. The phenomenon will initially suit smaller, EU-based companies, while the large US and German conglomerates struggle with explaining “part-ownership” to the market analysts and shareholders.
Robert Morgan is director of outsourcing advisory firm Burnt Oak Partners