Uncertainty has reached a fever pitch since the onset of the financial crisis. Though the recent G-20 summit in London has made markets across the world respond with a spirited show, the real impact on various industry sectors will take time. However, the rejection of protectionism by the G-20 members in the summit should certainly bring some cheer to the global IT outsourcing business.
Challenged by the change in reality, the IT outsourcing industry is already reeling under the need to reposition itself to sustain its high growth trajectory. Compared to 2007 when the business of outsourcing was on a roll, 2008-09 has brought more competition and greater demands on cost controls for most players in the segment. The volatility in exchange rates has made the case even worse. And with some belt-tightening by clients during a recession, little choice is left for most. From cost structures to human resource and portfolio of product and services, everything is going under scrutiny. What might emerge is anybody’s guess. But, I believe that we will see a more conservative mindset taking over the business of IT outsourcing.
While IT outsourcing companies will continue to be optimistic, their decisions to innovate in 2009-10 will be prompted by the prescribed need of the client. Innovation or big solution implementations will not happen unless it leads to better Return-on-Investment (ROI) and cost improvements. Open ended efforts will have no place in future schemes.
Convergence
The lines dividing discrete services like IT consulting, upstream application development, business process outsourcing will become even more obscure. Large service providers will face increasing competition not only from each other but also from outsourcing specialists working on a consortium basis. In short, outsourcing will move away from doing work in isolated pockets, thereby creating new opportunities for fringe players to join the game.
The next couple of years may also witness acts of merger and acquisition in this space. Led by situations where business process outsourcing is considered a natural extension of a relationship, many IT vendors may acquire smaller BPOs to look complete and offer more. In absence of a suitable option, two outsourcing entities may even merge to create one compelling proposition. However, there will be space for all, given the fact that recession will only fuel global sourcing demand, with corporations attempt to do more with fewer dollars.
New Opportunities
New verticals are emerging and will soon replace the historical mainstay. With the bastion of IT outsourcing - banking and financial sector - being in trouble, business of IT Outsourcing is now focusing more on recession proof industries verticals like manufacturing, healthcare etc., for growth. The healthcare industry globally has been a good adopter of global outsourcing in the last couple of years and trend is expected to continue. Other sectors like manufacturing, retail and telecom will be attractive industries as they look for opportunities to cut cost.
However, the client, with reduced IT budgets, will be more selective - demanding stringent Service Level Agreements (SLAs), and greater contractual flexibility.
Everything is Negotiable
In an environment of cost-cutting and flat budgets, businesses will increasingly look for service providers that can guarantee business outcomes. Contracts and pricing models are increasingly including components of risk associated with the business outcome. Going by the present day trends, the traditional pricing structure will soon give it in to a more dynamic pricing model. An alternate that’s already gaining traction is outcome based pricing. Related to a higher risk-reward incentive, this model ensures that the complete processes, technology and the supporting infrastructure are priced under a single scheme with unified Service Level Agreements.
Alternate Delivery
Alternative delivery and acquisition models (ADAMs) will be more pervasive in many aspects of IT development, delivery and management and become part of the mainstream. ADAMs will deliver IT services through new approaches, such as software as a service (SaaS), business process utility (BPU), infrastructure utility (IU), remote management services (RMS) and Web platform/cloud computing. These services promise lowered capital investment, greater flexibility and speed, and pay-for-use models.
Risk Hedging & Newer destinations
In the coming year, we will see more clients asking for alternatives to traditional Outsourcing locations like India to de-risk their service delivery. They will seek newer geographies with similar or niche capabilities. Countries like The Philippines and Vietnam has exhibited spectacular growth, with aggressive marketing strategies to increase traction in the global market.
Conclusion
Despite the global slowdown, the business of IT outsourcing seems to be rightly positioned for growth. Even though business margins may shrink, the industry will continue to grow in the future. Service providers with geographic diversity, well-managed overheads, and strong and long-term customer relationships are more likely to thrive in this period of consolidation and business realignment.
