Global Sourcing Trends: What’s Ahead for 2011

In recent weeks, outsourcing industry analysts have offered their assessments of key trends that have characterized the past year and will shape the year ahead. Here’s Compass’ take on some of the Next Big Things in the sourcing world for 2011:

Standard Service Delivery

Traditionally, client organizations have put the onus of cost savings on the service provider. This “customer is always right” mentality has contributed to inefficiency and prevented outsourcers from leveraging economies of scale.

Today, clients are increasingly recognizing that most of their IT requirements can be addressed through standard services, and in response are becoming increasingly open to rationalizing their internal processes and accepting standard ‘vanilla’ services.

For their part, Service providers are putting renewed emphasis on internal initiatives to standardize their own offerings to leverage economies of scale and stabilize profit margins.

This change in mind-set enables a more efficient approach to IT service delivery.  For example, in a traditional environment, a client pays a service provider a specified amount per server.  The service provider seeks to install additional servers, as that generates additional revenue.  Under a standard services model, the client organization pays a specified amount for a CPU minute. This creates an incentive for the service provider to drive efficiency in the delivery of that CPU resource, as greater efficiency equals higher margin.  The customer organization, meanwhile, has an incentive to utilize CPU resources more wisely, as every CPU minute consumed has a cost attached to it.

One of the key factors driving this change is growing awareness of the size of the prize.  Compass data shows that traditional improvement initiatives drive incremental efficiency gains within the existing operational environment, and typically produce annual savings of 10 to 20 percent.  Meanwhile, transitioning to a utility-based model and a standard service platform can produce savings of 40 percent and more.

In other words, rather than tightening the screws on the way things have always been done, IT leaders are establishing a new and significantly better way of doing things – a clean slate that fully leverages the benefits of standardization and utility computing.

Managing Multiple Service Providers

In recent years, many organizations have transitioned to a multi-sourcing model as their outsourcing deals move into their second and third generations.  In many cases, their internal vendor management and governance teams haven’t kept pace with the requirements of this approach.

According to TPI, one of the top five market trends for 2011 will be the “increasingly important role of the ‘air traffic controller’… As companies determine the best ways to integrate and manage services (and whether or how to depend on outside providers for some or all of this role), they should have more time and resources to redefine — and achieve — their innovation agendas.”

Some of the challenges that will need to be addressed include:

• Managing change across increasingly integrated business and technology functions
• Aligning service levels and expectations across service providers for seamless end-to-end service  delivery
• Ensuring the right internal skills to manage service integration across suppliers

India-based service providers

The Indian players will continue to alter the competitive landscape. According to analyses by TPI, the “start small” and “penetrate and radiate” strategies of Indian players will continue to pay off, along with focused IT and BPO strategies that have built awareness of broader value propositions aside from low-cost labor. Specifically, clients increasingly insist that India-heritage providers be invited to the table, even slicing scope specifically to ensure they can get at the best propositions.

Further, we’ll likely see an increasing number of head-to-head battles, especially in the mid-market; competition will continue to intensify.

Western providers have adopted the process and cost initiatives first embraced by their Eastern counterparts. Offshore providers are skilling up and augmenting onshore resources to try to win more consulting and integration work.

But it’s not yet clear whether Indian heritage providers can maintain their agility as they grow in scale.

Economic and political considerations

According to TPI, more companies will turn to rural locations for nearshoring and onshoring opportunities. This move will not be driven by high U.S. unemployment rates, but by business requirements. The price differential between the U.S. dollar and foreign currencies in low-cost destinations will narrow, making state partnerships attractive for buyers looking to rationalize their IT and BPO operational portfolios.

In terms of political influence, anti-offshoring sentiment could facilitate legislation to, for example, tax offshore call centers. While such initiatives could discourage offshore moves, politics will be secondary to continued industry pressure to reduce call volumes through the use of more self-service and automation tools.

Bob Mathers is a Compass Principal Consultant specializing in sourcing relationship and governance issues. Read his other piece for Nearshore Americas on End-of-Contract strategies here.