Last year was not a great one for the IT outsourcing (ITO) sector, with growth slowing due to a confluence of factors that gave ITO service providers a serious body blow.
Firstly, many service providers were still suffering from the aftershock of the global recession, a far cry from a few years back when organisations raced to outsource because of the scarcity of their resources. Naturally, the primary reason companies outsource IT in a downturn is to reduce cost. This focus on cost is then coupled with the increased competition for a piece of the ITO pound. Furthermore, new market entrants, alongside the big players such as India and China, also put pressure on prices as buyers embraced the clear cost savings produced by labour arbitrage.
At the same time, new organisations with unquestioned credibility entered the marketplace. For example, I was part of the Perot Systems team when Dell acquired the company in November last year. This now enables Dell, with it’s large Services division, (1 in 4 people in Dell are part of Services), to provide an end to end suite of services to its customers and flexibility around the technologies and brands, it is able to manage and support. The acquisition has resulted in new complimentary offerings in the process of being packaged and offered to existing and new customers across the globe.
Similarly, various business sectors are going through a phase of consolidation and rationalisation within the context of the global economic meltdown. Potential and existing Customers of IT Service Providers including those within Dell are looking for opportunities to:
• Rationalise and de-duplicate their application services portfolio
• Upgrade and transform their IT platforms gaining potential cost savings from Cloud technologies and lower emission hardware
• Rationalise back-office processes and in turn reduce complexity in their business and how their IT is managed today
• Not necessarily look to transfer staff to a provider but rather re-deploy into more strategic areas of the business or new projects
The above challenges provide for a complete overall of the traditional approach providers have historically taken in solving the complex issues that arise from these business challenges.
Furthermore, providers are now looking to provide “end to end” “open” solutions but that seek to transform the IT architecture in a modular manner providing flexibility around capex and opex and how these items are managed in a transaction.
Partnerships with customers is not uncommon in the IT Services industry that enables the transformed state of a customers IT to be leverageable and scalable to suite other similar businesses or customers. In fact, this area of opportunity will grow significantly as Public sector and Private sector businesses consolidate and rationalise their IT Systems
New entrants and a buyer's increased focus on cost have had only one result for ITO service providers whatever the year, an increasing pressure on prices, with many other providers struggling because of this price squeeze. The last 5 years economic “roller-coaster” has placed pressure on CIO’s needing to replace legacy technology and keep abreast of new operating platforms and thereto look to providers for creative solutions to address these historical issues that impact service and simultaneously, reduce their IT costs. Opportunities for IT Service Providers abound, if creative options are identified and proposed to affected customers.
Secondly, companies last year were understandably preoccupied with continuity planning and worked to avert risk. The market psychology was also worried about what impact defaulted IT services companies would have on the sector. Furthermore, many organisations were simply not ready to tackle the hard questions that bubble up in an outsourcing initiative during a recession. Such as, ‘isn’t it more ethical to save whatever jobs and profits you can, rather to completely cease operations?’ and ‘shouldn't we protect our manufacturing base for the purpose of national and economic security?’
Thankfully, this inquisitive wall has begun to crumble in recent times. From a personal point of view, it was painful to watch the downward slide of the stock prices of major IT service providers, and the much-publicised lay offs didn't help either.
Much of the slide was simply reflecting the overall bear market. However, many buyers were also worried about a significant drop in prices. This begged the question: could service providers afford to make significant capital investments?
The perception of problems kept many buyers from linking to mega deals. For some in the outsourcing industry, these mega deals have become a thing of the past. Indicative of an earlier style of outsourcing that is being replaced by a more modular and defined task approach.
By breaking down larger contracts into smaller deals, organisations can open up the possibility of using smaller suppliers and manageable projects with appropriate governance and flexibility as required by volatile business environments, and altering systems when business change demands it.
The drive towards businesses preparing to consider the leveraging of utility based computing and adopting a “pay as you use” model is allowing companies such as Dell to provide large cloud utility services leveraging their large global Data Centre and Delivery centre footprints and via scale deliver cost benefits, enhanced services adopting a strategy of IT Delivery, “from anywhere to anywhere”. This utility approach is customisable to meet the constraints typically experienced in many parts of the globe outside of the USA.
Many ITO service providers previously balked at deals where they either had to make huge cash outlays up front, delaying profitability to later years post the recession, too much uncertainty around future stability of the company.
As an example Satyam were consistently being tipped to be taken over by IBM by many top industry analysts including the likes of Phil Morris, European managing director at sourcing consultancy Equaterra. Sighting Satyam's delivery capabilities as its main attraction, "It would position IBM spectacularly for service and delivery in India" said Morris. Isn’t hindsight a wonderful thing? A classic case of a tier one provider clearly not willing to make big bets on infrastructure alone. I also believe that's one reason why the Procter & Gamble outsourcing endeavour never happened a few years back.
Today, IT outsourcing, like the majority of the technology industry, is post recession driven. As a result, 2010 has been a year of transition so far.
Many buyers have shifted their mentality and changed the nature of their outsourcing endeavours, while others have delayed outsourcing plans until they are sure of the direction they want to take and the financial stability of their outsourcers. Or pressure to replace aged assets is severe and the pressure to upgrade end user operating systems about to move out of support.
This has led to ITO moving from a growth sector into a mature business. For example, we are currently experiencing a global delivery continuum, where many organisations are evolving from crude business process outsourcing (BPO) environments (a lot of lift and shift), to SaaS delivery, in order to optimise that environment, and deploy a cloud computing ‘"plug-in’" or utility/cloud model.
Increasingly, buyers will reap the benefits of cloud computing delivery modals as more major providers enter the market. Many established providers with robust infrastructure, skilled staff and a legacy of delivering high quality services are finding their traditional markets saturated with competition. Cloud computing provides a logical emerging market that offers opportunities to grow their business.
The scramble to offer more benefits at a lower price could well rival the marketing wars we see today in the automotive industry. This can only result in brighter prospects for organisations seeking cloud cover in an economic storm. As the outsourcing industry goes through this transition, often driven by technologies such as cloud computing, businesses will continue to depend upon the services of a skilled and trusted systems integrator partner. Experience really is invaluable when it comes to configuring the right computing environment that addresses unique business needs.
In addition, I believe that severe price competition will continue for the rest of this year because the overcapacity hasn't worked itself through the system yet. In addition, the availability of offshore workers, coupled with their new skills and credibility, has firmly established offshore service providers as a viable, indeed, critical component of an outsourcing offering today.
As a result of this growing maturity, another trend I have see so far this year is that some service providers are now willing to assume more risk for the end product. Savvy buyers are demanding their outsourcers assume more of the business risk of outsourcing and providers are agreeing because they will share in the increased equity, if it develops. I'm seeing deals where the service provider structures and prices the transaction to own the end result.
Finally, I see the integration of ITO including the modernisation of applications and BPO. They are ‘meeting in the middle’ - combining IT in with functions such as human resources or finance, and front office outsourcing, which includes customer-related work such as contact centre services, and helps providers create new value in the outsourcing transaction. This is just what buyer’s need in these tough uncertain times.