Services

Outsourcing

Outsourcing continues to evolve

Arup Roy, Senior Research Analyst, Gartner discusses the domestic outsourcing market and the SaaS model

The global outsourcing market continues to grow at a steady pace, with a 2007 worldwide market growth rate of 10.2% for both IT outsourcing (ITO) and BPO, with BPO showing double-digit growth.

However, healthy growth rates for outsourcing did not necessarily mean that user organizations were without challenges. Although user organizations often have fundamentally sound procurement organizations to initiate outsourcing contracts, for many, their IT sourcing strategies and governance structures are still immature, lacking altogether, or misaligned with enterprise objectives. Because these organizations lack the basic building blocks for successful vendor management and outsourcing success, expected cost savings and other benefits are difficult to obtain. In extreme cases, the lack of needed trust and control to optimize the outsourcing relationship results in deal failure.

Growth in domestic outsourcing

In many cases, large outsourcing deals are transformational, because most Indian companies are embarking on new ways of reaching the market. Large businesses wants to focus on their core business and whatever are the non-core activities for them are being outsourced to third parties mostly IT infrastructure management alongside projects such as business transformation. They seek long-term strategic partners to help them create new products and services, such as commoditizing insurance policies or billing/marketing plans for telecom subscribers. IT outsourcing will play a key role in this transformation, and they are relying on their business partners to take charge of this key role.

This calls for a service provider’s commitment to sizable upfront investments and a complete change in approach as well as in account management. Recent deals, such as TCS’s passport automation deal with the Ministry of External Affairs and IBM’s deal with Max New York Life Insurance for the latter’s product Vijay, provide strong testimony to this trend. Recent deals also show a trend toward non-traditional pricing models, such as transaction-based and risk or reward-based pricing models.

Telecom, manufacturing and retail

Companies in telecom, manufacturing and retail markets have outsourced their finance and accounting (F&A) administration services, typically, outsourcing processes such as tax management, accounts payable, billing and accounts receivable. However, companies will increasingly outsource a wider set of F&A processes, including management accounting and treasury or cash management, as the end-user and service provider landscape matures, and service providers can demonstrate support capabilities and benefits from outsourcing multiple F&As.

In contact center Business Process Outsourcing (BPO) services, customer support and voice-based services are driving the Indian BPO market, because Indian companies are using improved customer service as a differentiator. They use outbound voice-based operations for marketing, lead generation and selling. Financial services and banking, telecom, transportation, and, to some extent, manufacturing firms that would ‘front end’ with their customers are adopting this approach.

Although contact center BPO is in its adolescence, several established contact centers in India have extremely high maturity (mostly serving offshore markets) and quality levels. With rising consumer spending, most consumer-facing companies have increased their focus on customer satisfaction and are reaching out to as many potential customers as possible. Compared with the time it took the European and American contact center markets to mature, India is learning fast and catching up quickly.

SaaS is gaining traction

More organizations focused less on outsourcing to harvest cost savings than in previous years and more on using providers’ global delivery models to access the right skills at a reasonable price, wherever they are. Notable this year, as well, was the continuing evolution of utility delivery models, with Software-as-a-Service (SaaS) gaining ‘mind share’ with a new slate of vendors and services for organizations to consider, and high expectations for the infrastructure utility (IU) continue, with providers and clients trying to figure out how to introduce the IU into contracts traditionally based on financial reengineering.

Gartner believes that the outsourcing market has reached a tipping point with regard to utility delivery models, and that change and innovation will take hold and accelerate in this area moving forward [2009]. More providers are developing utility-based offerings across infrastructure, application and business process domains.

The trend toward SaaS is gaining the most traction, with major software vendors, such as Microsoft and SAP, and large Internet players, such as Google and Amazon, making announcements about new SaaS offerings and mass-customized software platforms. User organizations need to realize that the utility delivery model is a viable alternative to traditional outsourcing, and they should seriously consider utilities in their sourcing strategies.

As told to Vinita Gupta