What’s New – January 2010

In The News

Areas Where Outsourcing Will Grow in the Next Five Years

Managed Print Services Outsourcing gets a boost

Service Outsourcing Industry Robust in China

Multi-country nearshore arrangement for Nokia

Late into services outsourcing, Wal-Mart signs on 3 providers

Articles in Depth

Economic Conditions Snapshot: McKinsey Global survey results

10 Outsourcing Trends to Watch in 2010: Various Research firms

Impact of 2009 and the Predictions for 2010: Providers weigh in

Switching to Outcome-Based Approaches in Outsourcing

Events & Reports

Webinar on Location Assessment of global services outsourcing

Europe Overtaking North America as Top Outsourcing Region: TPI

Procurement Outsourcing Market Full of Hype: Ovum

In The News

Areas Where Outsourcing Will Grow in the Next

Five Years

Experts predict several areas of the industry will experience significant growth over the next five

years. Reverse outsourcing, verticalization, emerging markets, business analytics, healthcare,

transportation, and ERP are some of the areas that will enjoy increased attention.

Industry trends

Reverse outsourcing’s growth has two facets. First, the economic downturn and the weakening

U.S. dollar have inspired some companies to move their outsourced work back to the domestic

arena. "Today there is a preference to relocate customer-centric functions back to the United

States," says Andre Pery of Kofax. This trend will "accelerate" over the next five years.

Because the economics now work, Pery predicts American suppliers "will invest more

aggressively in offering capabilities domestically." He says the foreign exchange rate combined

with the availability of large levels of highly-skilled American labor bring U.S. labor rates "more

in line with offshore rates." For example, suppliers can set up shop in rural areas where labor

costs are lower.

Pery also points out the federal government may provide incentives to keep work at home. That

possibility has inspired outsourcing firms outside the United States to open facilities there. "We

envision the stimulus package will provide incentives for companies to utilize outsourcing

suppliers that have facilities in the United States, including offshore firms that have set up U.S.

offices to take advantage of the anticipated incentives," he says. Infosys's acquisition of Atlanta,

Georgia-based BPO provider McCamish in November is one example.

The second major industry trend is verticalization, made possible by the strength of the second-

tier suppliers. Buyers of the future want specific, vertically oriented skills and domain

knowledge. For example, Cerner and Capgemini are two tier-two specialty suppliers in the

healthcare space. They will grow their business at a rate higher than some of the more

established firms.

In the past, Pery points out buyers "were somewhat reluctant to outsource their mission-critical

applications. But that dynamic is changing dramatically because of the economic volatility in the

downturn." Now companies need to shed costs, so economic pressures are driving them "to

outsource their mission-critical vertical applications to firms that have demonstrated experience

in that area."

In the financial services market- Paul Diegelman, Practice Manager, Finance and Accounting

Optimization for BancTec, predicts commercial banks will be exiting the check and payment

processing outsourcing business and strong, non-bank technology and processing providers will

take up the slack and dominate the market. "The economics of check and payment processing

requires high capital expenditures and onshore head count yet generates lower returns. That's

why commercial banks no longer favour it," he says. He predicts the continued outsourcing of

this process, which large corporations rely on for their working capital, will accelerate.

Don Schulman, General Manager, Finance and Administration for IBM, believes the industry,

which is already consolidating, "will continue to do so in an accelerated manner." He predicts

buyers "will start to circle around a few of the big players who have the funding to make the

necessary investments and drive to best practice standards."

Ravi Kapoor, Practice Manager, Supply Chain Management for Wipro, says another area of

growth for suppliers is helping buyers "embark on green initiatives throughout the enterprise."

Specifically, suppliers can advise buyers on how to make their data centers more cost-effective

by going green.

Offshore

Karthik H., Research Director, Everest Research Institute, says outsourcing companies will need

a delivery network of multiple locations to compete in the marketplace of the future. That means

suppliers "that have a global presence and access to skills in different markets will have a greater

chance to succeed," he says.

Karthik says it's common for Fortune 500 companies to have as many as 20 centers across the

world. "They want to access the unique skills and benefits of each location," he explains.

While he believes India will continue to retain its dominance as a global sourcing location, he

feels companies "will consciously think about diversifying into other multiple locations." Access

to skills is the most important driver, in his experience. But diversifying risk is also important;

the terror attacks in Mumbai last year "got people to think about diversifying some types of

work." A third driver is time zones. Suppliers have to do some types of work, like IT

infrastructure maintenance, in real time.

As for locations, Karthik predicts the Philippines will record "similar or faster growth than India"

because of its large talent pool and cultural affinity with the United States. Many of the other

countries in Asia "will record moderate growth," he notes. He says China is growing -- focusing

on its domestic market and Japan.

"Africa will be of increasing interest" in the next five years, the Everest executive predicts. The

reason: the new Seacom cable has slashed telecom costs up to 80 percent. For the first time,

African locations will offer a "robust infrastructure."

In Eastern Europe, Karthik believes growth will shift from tier-one to tier-two cities. Similarly,

he predicts the smaller locations in Latin America "will become increasingly significant."

Emerging markets

Everyone agreed emerging markets will be an area of growth - whether it's an emerging market

for new outsourcing buyers, new process domains, new capabilities such as analytics, or new

geographies for service-delivery locations. IBM's Schulman says the supplier's "emerging

markets business is explosive." He says IBM has made "significant investments" in China,

Eastern Europe, India, Latin America, and other parts of Asia.

He says the growth in those emerging markets started with mature corporations trying to enter

into commerce in those locales. But today and five years out, he says the real growth will reside

in home-grown companies in those markets. "The financial crisis has caused a lot of fast-

growing emerging markets to look inward and create a domestic capability instead of an export

market," the IBM executive explains.

These companies "recognize they need more sophisticated capabilities, so they are coming to us

and asking for help." Five years ago, he says offshoring "was all about labor arbitrage. But now

there's clearly no labor arbitrage in emerging markets. Today the industry is about more

enterprise business outcomes, process optimization, and cloud computing. We are able to

provide value-added services to these local companies that support their strategic evolution,"

Schulman continues.

Analytics and business intelligence

Rahul Singh, Head, BFS & INS BPO for Tata Consultancy Services, predicts within two years

"all customers will seek to outsource research and analytics, thus leveraging business insights

from their service providers to further support their business strategies."

Schulman says outsourcing buyers are looking for suppliers to provide "analysis and insight that

would transform their businesses." He says buyers want analytics embedded into their

outsourced process "to improve productivity and drive business outcomes." Suppliers have made

significant investments in these capabilities and can provide the insight needed to drive better

business decisions, which buyers "would never have achieved on their own."

For example, IBM's analytics services helped one client quickly identify that many of its

customers were beginning to slow pay and rapidly forecast the impact on working capital. "This

was something they previously could not have seen on their own," Schulman explains.

TCS assisted a U.S. retailer in eliminating more than $10 million in inventory turnover costs by

applying analytics to its supply chain services.

Mohammed Haque, Vice President & Head of Enterprise Solutions Service practice at Genpact,

predicts business intelligence, which runs on top of the ERP platform, "will grow big in the next

five years." He says that's where "most of our customers are investing heavily right now."

Haque says outsourcing buyers want to have a "single master view of data. This knowledge

improves their decision-making or increases revenue." In the past, customers have grown

through acquisitions, leaving different divisions on different platforms. The result: "They don't

have one single view of the truth," he says. In the future, buyers want a unified view of their

suppliers and their customers. So data management will be different.

He gives a procurement example. Many companies have no idea what they spend with their top

three suppliers. "Without a spend analysis, they are not able to negotiate bigger discounts. They

are in a much better position if we can deliver this knowledge," he explains.

Healthcare

To help the American economy recover, this year the U.S. Congress passed the American

Recovery and Reinvestment Act (ARRA), which included legislation that impacts the healthcare

industry. And then there's the current Congressional action on healthcare reform. "You don't

have to go much further than the front page of the paper to understand the government is going

to be taking a significantly greater role in healthcare," says Will Saunders, COO, Government

Healthcare Solutions Group for ACS.

These changes in the industry will increase outsourcing because healthcare providers and payers

cannot implement these changes on their own and certainly not at the pace they want. There will

be "a progressive shift toward healthcare outsourcing over the next five years," says Dr. Harry

Greenspun, Chief Medical Officer, Dell Perot Systems.

Transportation

David Cummins, Vice President of Business Development for ACS's Transportation Solutions

Group, points out the "widening gap between transportation demand resources and the 'supply' of

infrastructure has reached crisis proportions across the globe." The sagging economies,

escalating fuel prices, and the public's resistance to raising fuel taxes are exacerbating the

situation.

At the same time, environmental concerns are "front and center." Over the next five years, he

predicts the public sector will continue to turn to outsourcing to minimize capital expenditures

for increasing infrastructure capacity like new roads, transit systems, and ports. "Governments

will increasingly look to the private sector to increase the efficiency of their existing capacity

through technology and low labor costs," he says. He estimates the global outsourced

transportation market will grow by five to seven percent annually over the next five years.

Cummins predicts a key change in transportation outsourcing will occur over the next five years.

He says buyers are "looking for outsourcing partners to share in the risk and reward of taking

over significant public projects." An example of this type of arrangement is already underway in

Lima, Peru, where ACS is financing the up-front investment for a smart-card-based transit

solution; in return, the supplier will share in revenue from the operations.

ERP

Haque says the current economic environment "is a major catalyst for outsourcing ERP."

Another driver is "sub-optimized performance" of past ERP installations.

The third driver is the wave of mergers the economic recession created. For example, one

company's ERP may have SAP but the other may have Oracle. Once merged, these companies

have to select one platform and then implement it company-wide.

Lessons from the Outsourcing Journal:

Reverse outsourcing will grow as the foreign exchange rate and the high unemployment

rate in the United States make outsourcing to suppliers on American soil financially

attractive.

The economy is causing companies to consider outsourcing some of their core

competencies. But they want suppliers that have proven expertise in their domain.

Verticalization will become more important in outsourcing.

Global delivery services, or offshoring, will increase over the next five years because

companies will want their outsourcers to be able to move work to multiple locations to

access skills and diversify risk.

Changes in U.S. law will stimulate growth in healthcare outsourcing. Payers and

providers are realizing they lack the personnel, expertise, or facilities to manage

applications that have to be on continuously and that have to comply with newly

strengthened privacy and security regulations.

Analytics services is an area of growth for outsourcing because buyers want their

suppliers to provide insights from their data so they can make better decisions and

improve their bottom lines.

There will be market growth opportunities in the transportation outsourcing area because

governments want to invest in technologies that make the transportation system work

better. Over the next five years they will increasingly look to suppliers that are willing to

enter into risk-sharing arrangements to help finance transportation initiatives.

Source: Outsourcing Journal, January 2010

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Managed Print Services Outsourcing gets a boost

With companies around the world outsourcing their printing services, the printer and copier

industry seems to have found a rare bright spot.

Big companies are increasingly hiring Xerox, Hewlett-Packard and others to provide "managed

print services," a variety of outsourcing in which the vendor takes control of the customer's

production of office documents, typically owning the machines, advising on how to use them,

and taking a per-page charge.

The office-machine makers promise to cut document costs by as much as 30 percent by reducing

the numbers of printers and copiers installed on office floors and desktops, replacing them with

multifunction printer-copier-scanner-fax machines.

World-wide managed print services will amount to $20.3 billion this year, up 47 percent from

last year, according to Photizo Group, a Lexington, market researcher. The segment looks

increasingly attractive to manufacturers in a year when shipments of printers, copiers and

multifunction devices are down 7 percent to $49.8 billion.

Makers of copiers and printers are rapidly changing their strategies to boost their services

business.

"It's going crazy. We're drinking from a fire hose. It is now the driving force in the overall

market," says James Joyce, Xerox's head of managed printer services.

One of the biggest rollouts began a year ago when Procter & Gamble hired Xerox to manage its

print services around the world to monitor usage and reduce waste.

Xerox is replacing some 45,000 devices, mostly HP desktop printers, with about 10,000 shared

multifunction devices that are mostly made by Xerox.

Caroline Basyn, P&G's manager for the project, says that by using the new machines, which

print on both sides of a sheet, P&G has reduced use by three million sheets of paper, and it

believes it has achieved "40% energy use reduction."

Xerox and H-P are the leaders in the industry, and each sees managed print as a way to outflank

rivals such as Canon and Ricoh Bruce Dahlgren who heads HP's managed print services unit,

which was unveiled earlier this fall as a new division in H-P's printer group, says the company's

history of selling services for computer departments gives it expertise with the networked

devices used in managed printing.

To expand its offerings in the multifunction arena, HP recently signed an agreement to sell

Canon's devices in addition to its own. It is also developing a suite of software products designed

to manage document flow within industries such as insurance and loan-processing.

Xerox's Joyce says "this is a different playing field, and the contracts are huge." The contracts

also discourage customers from frequent competitive bidding. Xerox just signed a multi-million

dollar managed-print services contract with Ingersoll-Rand Co. that lasts nine years.

Ken Weilerstein, who follows the market for Gartner Inc., says that "it's not net new business.

The customer is reducing what they're spending, but the vendor is hoping to cannibalize someone

else's business."

Xerox, among the first to spot the managed-print opportunity, is also adding to its services

revenues through its pact to buy Affiliated Computer Services Inc. for $6.4 billion.

The purchase gives Xerox an opportunity to manage printing for ACS customers, who typically

hire ACS for other tasks, such as managing information technology operations or processing

invoices. H-P has moved to take advantage of relationships in its huge computer-services

organization, which manages many data centers for big enterprises.

Acquiring a big services organization was a key element in Canon's agreement last month to buy

Dutch printer maker Oce NV for $1.09 billion. Ricoh expanded its services operations last year

when it bought Ikon Office Solutions for $1.62 billion.

Photizo says its data show that HP surpassed Xerox last year to become the largest managed

print services firm with a 35 percent share to Xerox's 29 percent. Ricoh is third with a 14

percent share followed by Canon with 5 percent and Lexmark International with 4 percent.

Gartner says that it hasn't completed analyzing its data but it believes Xerox is still the leader in

the field.

Source: Wall Street Journal, December 2009

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Outsourcing Industry Robust in China

The global economic meltdown impacted many of the clients of BT Frontline, which provides

outsourcing services for the IT systems of docks and logistics companies. But its General

Manager, Lawrence Low, is still satisfied with the company's performance amid the financial

crisis and confident about its future

China's service outsourcing industry, mostly about software outsourcing, bounced back in the

second half of the year from a hard time of three months caused by shrinking demand from the

global market, according to Yu Hengzhuang, vice president of Dalian Software Park.

"We have gained access to high-end market and recently entered the Middle East market, which

more than offset the impact of the global downturn," Low said.

"Our business not only survived, it grew and thrived," Low said with a smile, keeping the exact

figures as business secret.

Rapidly developing Industry

The software outsourcing park in Dalian, the industrial hub in China, attracted 63 new clients in

2009, bringing the overall number of businesses in the park to more than 400, and the park's total

sales are expected to top 20 billion yuan, up 32.9 percent year on year.

The sales of Dalian's software outsourcing business grew from 200 million yuan (29.3 million

U.S. dollars) to more than 30 billion yuan in the past 10 years. A total of 700 companies are in

the industry, including 300 joint ventures and more than 40 Fortune 500 companies.

In the first ten months, the industry's sales in Dalian grew by 33 percent to 33.7 billion yuan and

its export grew by 34 percent to 1.1 billion U.S. dollars.

While Dalian has become a world famous hub of software outsourcing after Thomas Friedman

compared it with Bangalore in India, another less known industrial hub with equally fast pace in

east China's Jiangsu Province, is taking shape.

The contract value of Jiangsu's software outsourcing industry reached 3.28 billion U.S. dollars in

the first 10 months of the year, a growth of 174 percent. The province has 2,470 companies in

the industry, with 290,000 employees, according to statistics from the provincial department of

commerce.

The provincial capital Nanjing's software outsourcing industry had a contract value of 2.1 billion

U.S. dollars in the first 11 months of the year, growing by 239 percent.

"The income of China's software industry, which software outsourcing takes a major part, has

been growing by 38 percent annually and its revenue is expected to top 1 trillion yuan in 2010,"

said Hu Kunshan, vice chairman of China Software Industry Association.

China's software industry earned 757.3 billion yuan in 2008, and the figure is expected to reach

900 billion yuan in 2009.

Employment numbers

More than 60,000 people are working in the software outsourcing industry in Dalian.

China's outsourcing industry recruited 690,000 new employees, 460,000 of whom were college

graduates, in the first 11 months of 2009, according to statistics released on a national conference

on commerce.

China's Ministry of Human Resources and Social Security expects the outsourcing industry to

create 1.2 million new jobs in five years, including 1 million jobs for college graduates.

At the end of Sept. 2009, 1.42 million people were working in 8,060 outsourcing companies in

China, said Qian Fangli, deputy head of the foreign investment department of the Ministry of

Commerce.

The software outsourcing companies in China have enough programmers but lack mature project

managers and decision makers, who are on the top of the talent pyramid, said Yu Hengzhuang,

vice president of Dalian Software Park.

The gap in talent pool limited the size of such companies to less than 300 people, which is a

human resource threshold to carry out core projects with high added value. "That's why Chinese

companies are now the lowest ring of the world software outsourcing chain," Yu added.

Chengdu: The Panda City of Mainland China

Chengdu, the capital city of Tian Fu Zhi Guo has a significant historical background. The city

originated as an indispensable part of ancient Chinese culture, the Bronze culture. Chengdu also

stands out for its Chu embroideries and brocades and is a flagship of the handicraft industry in

China.

Chengdu is ranked 33rd

in the Global Services-Tholons Top 50 Emerging Outsourcing Cities -

2009 study. Chengdu Tianfu Software Park, established in 2005 gives a boost to the country's IT

and service outsourcing Industry. The park offers services like recruitment, staff dispatching,

company incorporation, BOT/outsourcing solutions and training services to the companies who

want to set up their center in the park. This step has contributed towards the enhancement of IT

services like software development and infrastructure services in Chengdu.

As per Tholons , an investment advisory firm, in 2008, the revenue from Chengdu's software

industry rose by 37.7% year on year reaching RMB 42.7 billion, which accounts for 5.6% of the

nation's total. Currently, more than 450 certified software enterprises operate in Chengdu,

including 102 enterprises with integration qualifications for a total of 100,000 practitioners.

Chengdu is the most cost effective destination as compared to other provinces in China. The

average wage in Chengdu's IT and IT-related industries is less than half of that in Beijing and

Shanghai. The average entry level salary in ITO is US$400 – 500 and that for a BPO is US$250

– 350.

In 2009, Chengdu had many new notable companies setting up data centers: Accenture

(February), DHL (April), Alibaba.com (July) and Wipro (November).Other service providers

and captives in the city include Siemens, Lafarge, IBM, Amazon, Microsoft, Symantec, Ubisoft,

Gameloft and GGL.

―Unlike Dalian, which due to its language capabilities is an excellent fit for Japanese/Korean

clients, Chengdu is more versatile,‖ says Saugata Sengupta, Analyst, Tholons Advisory Firm.

With its mix of not only language versatility (Japanese, English and Chinese) but also higher

education institutes, Chengdu offers a strong value proposition to both American and European

clients.

Although significant progress has been made by the central and the various provincial

governments to pass IP related laws, the implementation still remains quite weak

The investment climate in China has improved over the years and Chengdu in particular offers

one of the largest SEZs in the world which has proved a significant attraction to investors. The

government has lately offered attractive incentive packages for organizations looking to establish

in Chengdu (IT/BPO space) – making it a viable and attractive option.

Sengupta of Tholons concludes, ―China in their evolution to a services economy from a

primarily manufacturing driven economy, has to seriously consider collaboration and not

competition among its provinces. The environment of pure competition created by these

provinces is detrimental to the development of China’s outsourcing potential and has turned out

to be unhealthy for the 'China Outsourcing Brand'. Without a strong hold of the brand the

country is offering, it cannot move into one direction and lacks a single value proposition in the

client’s eyes.‖

Source: TMC news, Global Services Media, January 2010

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Multi-country nearshore arrangement for Nokia

Nokia has outsourced desktop management and help desk functions in 76 countries to Indian

outsourcer HCL Technologies

HCL announced that the handset maker has signed a five year contract. The outsourcer has set up

a new office in Helsinki, Finland, to deliver nearshore services to Nokia, in addition to delivering

services from centers in Poland, China, the U.S. and India. The contract includes multilingual

helpdesk services in 13 languages, global account management, workstation packaging, creation

and maintenance, workstation security management, and onsite support services delivered by

partners, HCL said.

Indian outsourcers have typically not been able to get desktop management contracts because

they do not have a global presence, and rely on local partners at each location, said Siddharth

Pai, a partner at outsourcing consultancy firm TPI in Houston.

A key factor in this relationship will be how much control HCL can exercise over its local

partners, Pai said.

The Helsinki center will have 100 staff and will help HCL offer nearshore delivery of services to

its other customers in the Nordic and Baltic regions, the company said. Some Indian outsourcers

like HCL have set up facilities in the U.S. and Europe to offer customers a mix of services

delivered from locations close to the customer, and from offshore locations like India.

Source: Offshoring Times, January 2010

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Three IT Firms Bag $600 Million Wal-Mart Deal

Wal-Mart has selected three IT vendors in India Infosys Technologies, Cognizant Technology

Solutions and UST Global for multi-year contracts worth over $600 million.

The amount is roughly equivalent to the value of goods — textiles, handicrafts and other

products — that the world's largest retailer sources from India every year.

This development is expected to boost the IT outsourcing landscape in India, given that Walmart

typically prefers to develop its retail applications in-house. Walmart gradually started buying

packaged retail applications from leading software vendors such as Oracle, HP and SAP only

towards the end of 2007. It had, however, given Infosys and Cognizant pilot projects about five

months ago.

―What is more important is that these three vendors have now got a ticket to be in the club of

Walmart's list of preferred vendors which will help them in growing this account in the long-

run,‖ said a source close to the development.

According to the contract, Infosys and Cognizant will be responsible for application

development and support, while UST Global will be responsible for specific testing of these

applications.

Asked about the deal, Infosys and Cognizant declined to comment. ―As a policy, we do not

comment on speculation in the marketplace,‖ spokespeople from both companies said. A UST

Global spokesperson in India said the company does not comment on any client specific

information as ―we have non-disclosure agreements with most of our clients‖.

UST Global is part of the $6 billion US-based business conglomerate Comcraft Group, with a

major presence in India.

Walmart's media relations director John Simley replying to an e-mailed query said: ―We have a

large and growing business and productive relationship with many Indian companies. We do not

comment on speculations about the nature of any business relationship.‖

Walmart, the largest private employer and grocery retailer in the US with revenues of $404

billion (2009), selected the vendors after a competitive bidding process in which most Indian IT

services companies participated, except TCS, India’s largest IT services firm.

TCS failed to qualify for the bid because it has an exclusive partnership with Target, another

American retailer, who is into direct competition with Walmart. Among the bidding companies,

Walmart shortlisted six contenders of which three were finalised based on their level of

competency in various processes.

Unlike other retailers, Walmart does not want to open its own captive centre in India, even

though the company has established a huge sourcing office in Bangalore sometime back.

Some of the world’s leading retailers like Tesco, Target and Supervalu have their own software

development centres in India. Tesco’s Hindustan Service Centre which went live in May 2004,

employs close to 3,000 people. In 2006, Supervalu which is the third-largest grocery retail chain

in the US, also set up a captive development centre in India for new applications development,

technical operations and testing of applications.

Source: Business Standard, December 2009

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Articles in Depth

Economic Conditions Snapshot, December 2009:

McKinsey Global Survey results

For the first time this year, a majority of executives expect consumer demand for their goods to

rise in the near term. Respondents offer relatively positive views of the economy and say they can

now make longer-term strategic plans. However, many expect investment decisions over the next

two years to be affected by heightened exchange rate volatility.

As a tumultuous year draws to a close, executives are moderately hopeful about their nations’

economies and their companies’ prospects, according to a survey in the field of 1,600 executives

representing the full range of industries, regions, and tenures during the second week of

December 2009. Just over half of executives continue to say economic conditions are now better

than they were in September 2008, and for the first time this year a majority expect customer

demand for their companies’ products or services to rise in the near term. In addition, notably

more are seeking—and getting—external funding than have done so in more than a year. And

after reporting a striking shift in favor of short-term planning early in 2009, executives say their

companies are once again able to plan for the medium and long term—but also that they remain

wary, assessing more options and checking progress more frequently than they did before the

crisis.

This survey also included some questions on currency volatility and reserve currencies. Nearly a

third say that exchange rates today have an ―extremely‖ or ―very significant‖ effect on their

profits. Further, executives expect greater future volatility in exchange rates as well as significant

changes to global exchange rate arrangements in the coming years—only 18 percent expect that

the US dollar will still be the dominant reserve currency in 2025.2

Moderated hope The share of executives with largely positive views on their nations’ economies has continued to

grow slightly over the past six weeks: just over half say economic conditions are better than they

were in September 2008 and nearly 70 percent say they expect economic conditions to be better

still at the end of the first half of 2010 (Exhibit 1). Further, for the first time, more than half of all

executives (57 percent) expect their countries’ 2009 GDP to increase—a jump of 8 percentage

points in six weeks, perhaps reflecting a view that the end of the year is now close enough for

them to express some certainty.

Respondents are also moderately hopeful about their companies’ prospects. For the first time this

year, more than half (54 percent) expect customer demand to increase in the near term, compared

with 39 percent in April 2009.3 However, the share expecting a profit increase—46 percent—is

almost identical to those who expressed a similar view six weeks ago, indicating that executives

see continued pressure on pricing and costs. Indeed, cost control remains the single most

frequently chosen action that companies plan to take over the next 12 months to cope with

changing economic conditions, with 65 percent saying they expect to undertake it.

Expectations for the workforce remain stable, and just over a quarter of respondents expect an

increase in the near term. Expectations for additional decreases are likeliest among respondents

at companies headquartered in the eurozone (39 percent) and those in manufacturing (34

percent).

More robust funding and planning

For the first time in more than a year, the share of respondents saying their companies have

sought external funds has changed significantly, increasing to 41 percent in this survey, from 32

percent in October—a figure consistent with findings over the past year. Further, more were able

to get the funds they sought (Exhibit 2). These findings may indicate a rising, and apparently

well-founded, hope among executives that funds will be available to them.

Most companies have made several changes to their strategic-planning and budgeting processes

since September 2008. Taken together, these findings indicate greater comfort with planning for

the future than we saw a few months ago, but also ongoing wariness. In general, companies are

making strategic plans for lengthier periods now than they were in March 2009: then 13 percent

were planning no more than one quarter ahead, a figure that has now dropped to 6 percent, while

the share of companies planning for three years or more in advance is now at 38 percent, a rise

from 24 percent. (Nonetheless, 20 percent of respondents say their budgets cover shorter time

frames than they did before the crisis, while 15 percent say the same of their strategic plans.)

In both processes, the most common change is assessing progress more frequently (Exhibit 3).

Some companies are also building more flexibility into their planning, with 12 percent of those

who report that their planning time frames have changed saying their strategic plans now cover

more time frames than they did before the crisis, and a third saying their budgets now take

several scenarios into account.

In regard to who’s part of the planning, a slim majority of respondents (52 percent) say the share

of executives involved in planning hasn’t changed since September 2008; just over a third report

a change. In each case, roughly equal shares say half or more of their companies’ senior

executives are involved in bringing issues to the attention of strategic planners (36 percent) and

in making decisions (40 percent).

Volatile currencies

Turning to the questions on currency and exchange rates, one of the most striking findings is that

only 18 percent of respondents expect the US dollar to be the dominant reserve currency in 2025;

even among respondents in North America the figure rises only to 31 percent (Exhibit 4). The

frontrunner, selected by just over a quarter of all respondents, is the dollar and the euro jointly,

followed by a basket of currencies such as the International Monetary Fund’s Special Drawing

Rights (SDRs).

The survey indicates that both the level of exchange rates and exchange rate volatility have a

large and growing effect on company profits and investment decision making. Thirty percent, for

example, report that exchange rates have an ―extremely‖ or ―very significant‖ effect on company

profits (Exhibit 5), while 21 percent of respondents report that exchange rate uncertainty has

reduced their planned investment over the next two years (most report no effect). Further, 44

percent of respondents believe that the effect of exchange rates on their companies has increased

over the past five years and 43 percent expect exchange rate volatility to increase over the next

two years; only 21 percent expect exchange rate volatility to decline. Taken together, these

results suggest that exchange rates have—and are likely to continue to have—a material effect on

company competitiveness.

There is significant variation in these results. A full 50 percent of manufacturing companies,

which are more likely to be in trade-exposed activities, report an ―extremely‖ or ―very

significant‖ effect on profits. And while only 17 percent of North American companies reported

an ―extremely‖ or ―very significant‖ impact on profits from exchange rates, 42 percent of

respondents in developing markets report such a relationship.

Source: McKinsey, December 2009

Back to Top

10 Outsourcing Trends to Watch in 2010: By

various research firms

Both suppliers and outsourcing customers could be in for a bumpy ride in the “new normal” of

post- recession 2010.

It was a long year of intense ups and downs in the IT outsourcing industry. Consolidation among

vendors and interest in remote infrastructure management increased, while overall outsourcing

demand and IT services pricing decreased.

The market for IT outsourcing is expected to rebound a bit in 2010, say industry watchers. For

instance, more than 75 percent of the service providers polled by EquaTerra in the third quarter

of this year reported continued growth in their deal pipeline, which was up 10 percent from the

previous quarter and 34 percent from the same period last year.

But don't expect too robust a revival. Outsourcing consultancy Everest predicts that although

suppliers will see a resurgence in demand for IT and business process outsourcing services in

2009, growth rates are unlikely to return to pre-2008 levels.

Both suppliers and outsourcing customers could be in for a bumpy ride in 2010. Here are 10

trends to look out for as the IT services industry finds its feet in the "new normal" of the post-

recession.

1. Transformers 2. Sure, outsourcing customers will still want vendors to transform IT in 2010.

But revolutionizing IT service delivery is expensive and difficult.

"Optimization is the new transformation," says Mark Toon, CEO of outsourcing consultancy

EquaTerra. "Ultimately, organizations will still want to 'transform' how they deliver back office

services, but they typically will want to move in pragmatic, incremental steps and focus on

achieving best in class, standardized and optimized delivery models."

2. If at First You Don't Succeed, Renegotiate. There has been an increase in the number of

contracts being renegotiated and rebid during the past 12 months, according to outsourcing

consultancy Compass America, and that will continue in 2010.

"While many organizations remain keen to avoid the costs of new capital and migrating to new

suppliers," says Tom Schramm, EquaTerra's managing director of finance and accounting,

"investment is being made in ensuring existing suppliers and internal processes are delivering

optimum value."

3. Multi-Sourcing Malaise. Multi-sourcing seems ideal in theory-work with best-in-class IT

service providers and keep costs in check, thanks to the competition. In reality, it's been difficult

at best and disastrous at worst for many customers.

"Organizations are reassessing their approach to selective sourcing and multi-sourcing, and

realizing that they need to have a certain level of maturity in terms of processes, governance and

vendor management in order to make the multi-vendor model work," says Bob Mathers, senior

consultant with Compass America. "Organizations that have pursued multi-sourcing without

investing in management capabilities are finding themselves longing for the problems they used

to have with their one and only vendor." Watch for reevaluation and restructuring of these

relationships next year.

4. Captive No More? While certain companies will continue to set up fully-owned IT delivery

centers abroad, look for more captive center divestitures in the new year and a "marginally

lower" number of new captives being set up, predicts Everest.

5. The Urge to Merge. The number of top-tier service providers shrunk this year, creating both

challenges and opportunities for other vendors in 2010.

"Consolidation at firms, including HP, EDS, Dell, Perot, ACS and Xerox, may represent an

opportunity for their competitors," says Charles Arnold, managing director of EquaTerra's IT

advisory for the Americas. "From acquiring former staff of top-tier providers to snapping up now

empty chairs at the bidding table, competitive providers may be able to leverage this chance to

grow capability and market share in 2010."

The M&A party is likely to continue after we've rung in the new year. "This consolidation will

most likely involve tier two and tier three providers, as they struggle to compete with the breadth

and depth that their tier one competitors can offer," says David Rutchik, partner with outsourcing

consultancy Pace Harmon. "We would not be surprised to see a non-offshore provider acquiring

an offshore-based provider."

Everest predicts that most consolidation in 2010 will focus on acquisitions of "adjacent and

complementary capabilities across functions, verticals and geographies," as opposed to mergers

solely to increase scale.

6. Offshoring to...America? The greenback has had a gruelling year. That could play out in some

interesting ways. "With the continued decline in value of the dollar and sluggish employment, I

would expect to see more U.S.-based sourcing solutions evaluated by private and public sector

clients across the globe," says Peter Iannone, EquaTerra's executive director for the Americas.

7. The Mega-Death of Mega-Deals. Increased near-term cost pressures will drive a continued

decline in mega-deals in 2010, Everest predicts. Customers will continue to eschew the billion-

plus deals for more flexible approaches to outsourcing, says Lee Ayling, manager of Equaterra's

U.K.-based IT advisory.

"In 2010, we will see many contracts focused on core processes with shorter, less expensive

transition periods and reduced return on investment timescales," says Brad Everett, executive

director of EquaTerra's human resource practice.

8. The Public Interest. All signs point to increased outsourcing in local and state government.

"Budgets are tight, but demands for new technologies are strong," explains Glenn Davidson,

head of EquaTerra's public sector practice. "The winners in the competition will be offering

innovative financing and strong risk insurance."

However, he predicts decreased outsourcing in D.C. "The federal government, with its ability to

print money and this administration's push for insourcing, is likely to continue its investment in

internal solutions," Davidson says.

9. The (Slow) Return of the Discretionary Spend. Providers of application development, and

maintenance and consulting services will develop innovative contract and pricing structures to

win customers as the market rebounds next year, according to Everest. Both types of deals took a

hit as buyers put discretionary spending on hold.

But such projects will make a gradual recovery in 2010, predicts Everest, noting that "the pace of

this change will be dictated entirely by the improvement in the global business environment."

10. Semi-Sourcing. Cloud computing and software-as-a-service-which EquaTerra's Stan Lepeak

calls "semi-outsourcing alternatives"-will make waves in the IT services industry in the year

ahead.

The IT outsourcing market has reached a major tipping point, according to Forrester Research

analysts, and a focus on outcomes means that traditional deals will continue to decrease during

the next several years as new utility and cloud service offerings proliferate. "This will be a large

focus as companies try to figure out how this will work," agrees Dave Brown, head of

EquaTerra's financial architecture practice. "Those that develop a sustainable commercial

offering will hit the headlines early and often."

Modularity will be the name of the game. Suppliers are poised to offer buyers more and more

plug-and-play services coupled with pay-as-you-go pricing. "We have observed a continuing

move toward a more scalable and virtual infrastructure for many services...and more aggressive

efforts to take advantage of sourcing's ability to scale up or down with the size of the business,"

says Melany Williams, partner and managing director of service provider consultancy TPI

Momentum.

But it will be small and midsize companies leading the charge in this space in 2010, says

Everest, while large enterprises wait for more of the technical and business challenges to be

resolved before adopting these new delivery models.

A word on pricing

Outsourcing prices dropped overall in 2009, and industry watchers expect the downward trend to

continue next year. It's not just the global economic slowdown that's sending IT service prices

south, it is also the increased use of offshoring, pricing pressure from customers, and a reduction

in vendors' services.

"We see more companies willing to outsource offshore to take advantage of global labor

arbitrage opportunities than in the past," says Ben Trowbridge, CEO of outsourcing advisor

Alsbridge, which owns price benchmarking firm ProBenchmark. "One of the issues we see is

that lower prices can also be driven by disaggregated services." For example, lower desktop

support prices might be due to a vendor delivering remote infrastructure management support.

But they might just as well be the result of a reduced scope of services that leaves the client with

a lower level of service or possibly having to retain other costs--which negates or reduces the

customer's potential savings, Trowbridge adds.

Mark Toon, CEO of outsourcing consultancy EquaTerra, says that buyers of outsourcing services

have remained focused on cost cutting and avoiding future investment throughout 2009. Toon

believes that IT services customers will continue to focus on price through 2010. But, that "price

pressure will be tempered by the need to ensure overall deal parameters do not jeopardize

success," adds Stan Lepeak, EquaTerra's head of global research.

Should the economy show strong signs of life in the new year, some say it won't be a buyers'

market at all. "Much depends on whether or not the apparent signs of economic recovery prove

true," says Chris Kalnik, partner and managing director of financial analysis for sourcing advisor

TPI. "If the economy strengthens, TPI believes that the service providers will attempt to recoup

some of the price concessions that they have made over the past year."

RIM's Effect on IT Outsourcing Prices

On the infrastructure side of the IT outsourcing house, market share will continue to shift toward

remote delivery of services where possible, and offshore players will drive desktop and network

service prices to new lows. As remote infrastructure providers improve their capabilities, more

infrastructure outsourcing customers may look offshore for savings, while the broader global

economic slowdown will continue the pressure to reduce costs in the Americas, says

Trowbridge. "These two trends are working together to drive overall market prices lower," he

adds.

But those cost savings may be short lived and slight. What's more, RIM isn't for everyone.

"Maturity in this market has led organizations to identify the processes that are better delivered

locally and to select service providers [based] on flexibility and customer intimacy as well as

price," notes Paul Cornelisse, managing director of EquaTerra’s information technology

advisory.

Meanwhile, Cost of Onshore Outsourcing to Rise in 2010

Ovum Analyst Peter Ryan said: "Onshoring centers in North America, Europe and

Australia/New Zealand, are already seeing vacancy rates that are substantially higher than usual"

The cost of outsourcing for end-users within the UK looks set to increase as country begins to

come out of recession, research has suggested. The operating costs associated with areas such as

real estate and staff are set to increase over the next 12 months, according to the report from

technology consultants Ovum.

This will lead to more staff employed on a permanent in-house contract and could force

outsourcers who want to retain the best staff to up pay, in a move which will pass increases on to

clients. Significant onshore opportunities for outsources will still exist however, according to the

report, particularly in areas that have been hit by the recession.

Source: Computer World, IT World, Sourcing Focus, December 2009

Back to Top

Switching to Outcome-Based Approaches in

Outsourcing

Among the various changes that will impact outsourcing over the next five years, Don Schulman,

General Manager of Finance and Administration at IBM, says the first will be a focus on

outcomes-based pricing models. "Focusing on clients' end-to-end processes, the discussion

moves to outcomes pretty fast when considering the advantage of an outsourcer doing a client's

work. Over the next five years, this will become a critical differentiator in the way clients and

providers work together," he predicts.

Les Mara, who leads Enterprises Services BPO in EMEA for HP, agrees. "In the next few years,

I think that outcome-based approaches will accentuate polarization in the market between niche

providers and mainstream providers." He predicts polarization because he believes that buyers

can only undertake these sorts of arrangements with larger, more mature, asset-rich providers.

Mohammed Haque, Vice President and Head of Enterprise Solutions Service practice at

Genpact, says that 90-95 percent of outsourcing arrangements today are still based on time and

materials or a fixed fee with only five percent tied to outcome-based pricing. But he predicts that,

within the next five years, 40-50 percent of the contracts will be outcome based.

Though some companies achieved truly outstanding results from outcome-based approaches

since 2001, to date they are few and far between. The problems with this sort of outsourcing

arrangement lie in the following aspects:

It requires that the buyer have a deep level of trust in the provider -- not only its

capabilities but also its continual demonstration of partnering.

Measurable outcomes require a level of visibility that one or both parties may not be

willing to provide.

It may not be possible to measure a provider's exact impact on an outcome.

The service provider must assume a great deal of risk since it does not have influence

over all aspects that impact its ability to achieve the outcome. And the amount of risk

increases significantly when the outcome is higher up on the value chain.

Historically, companies found it difficult to achieve success in these kinds of outsourcing

arrangements. What will enable the predicted shift to nearly half of the deals being outcome

based in the next five years?

Enablers and catalysts for the change to outcome-based outsourcing

The industry experts we interviewed discussed three catalysts that will enable buyers and service

providers to widely adopt an outcome-based approach over the next few years.

1. Outsourcing is now evolving beyond savings through labor arbitrage and focusing

on new and different ways to create value, including synergies between functions as

key drivers of value.

Scott Mingee, Senior Vice President, Business Development for ACS's commercial

healthcare, finance and insurance lines of business, explains a key enabler of changing

from unit-cost or transactional-cost approaches to outcome-based approaches. "The

approach is changing especially in areas where the buyer has a significant fixed cost. This

is forcing them to get more creative because so much of their current spend isn't in

people, so there's not as much savings available through labor arbitrage. The value in an

outcome-based approach depends on transformation through new innovations that a

provider needs to bring to a specific function."

Rahul Singh, Head of BFS & INS BPO at Tata Consultancy Services (TCS), concurs and

adds that customers will no longer want to pay huge fees for "consulting" and

"improving" processes; instead, the providers will find it imperative to transform the

processes to drive better output and outcome.

2. Providers are now investing and innovating around invigorating their capabilities in

and around new value creation.

Mingee says leading providers are now building the capability for a value-creation

approach and that more buyers will adopt it as the basis of their arrangement over the

next three to six years.

Part of this involves building platforms and simplifying processes. But it also requires

that providers gain deeper knowledge of a customer's industry. Haque at Genpact

believes the industry knowledge and domain knowledge will play an important role in

achieving business outcomes.

Haque also says the capability for delivering more value outcomes necessitates

"providers not being tied to a linear group. It will call for a change in the mix of the

consulting and technical teams. Providers will have to change their complete game in

order to help their customers change the outcomes," Haque states.

Mara agrees. "In outcome-based approaches, the outsourcer doesn't just provide services;

it also takes responsibility for achieving a different business outcome on a different level

of balance-sheet performance." He cites an example of migrating all of a buyer's finance

and accounting functions within the engagement's pricing based largely on the provider's

performance in improving the buyer's working capital position.

Mara says that, although this is an extreme example of an outcome approach by today's

level of risk adoption, he believes "buyers and providers should definitely be encouraged

to focus on outcome objectives. I don't believe buyers should just hand over a process in

the sense of 'do this for us' anymore. Outsourcing can deliver higher value, and

outsourced processes need to achieve outcomes that align with the business agenda of the

client."

However, he adds that outsourcing arrangements focusing on outcome objectives can

only be successful when both parties are collaborative and take a partnering approach.

3. The partnering approach to outsourcing relationships will deepen.

"Outcome-based sourcing creates a greater level of dependency on the service provider,"

warns Mara. Haque explains it is "extremely important that the buyer understand the

level of risk the provider must take to help the customer achieve the desired business

outcome. This will only work if it is a complete partnership type of relationship and if

there is strong governance and relationship management. And senior leaders on both

sides must work together."

V.K. Raman, Head of Domain BPO Services at TCS, says that over the next two to three

years the delivery of transactional services will become a hygiene factor and providers

will increasingly contribute to the customer's business strategy.

Outcome-based sourcing will involve a longer contract life. And it will definitely involve

a deeper level of collaboration as well as the buyer's willingness for the provider to take

on a trusted advisor role.

Advice for establishing an outcome-based model

There are some fundamental things that are different in structuring an outcome-based approach

to outsourcing.

1. Transparency and trust. Mingee at ACS says the parties must first get to a deeper level

of trust, which will also increase the level of transparency, collaboration, and

information-sharing than currently exist in most outsourcing arrangements in today's

environment.

"By transparency, I'm talking about sharing with your partner all of your information, not

just some basic volumes and general costs. It's both companies talking about their

business, where their problems lie, the opportunities, and developing a shared vision of a

new outcome."

Historically, companies that achieved outstanding success with outcome-based

approaches undertook those initiatives only after they achieved a certain level of mutual

trust. However, because of the three enablers described above, and because of the impact

of the mid-sized market being more willing to immediately adopt outcome-based

approaches as a means of quickly gaining competitive advantage, the outsourcing

industry will likely see more companies establishing outcome-based sourcing initiatives

sooner in the time frame of a relationship.

2. Data requirements. Haque advises buyers must understand that a switch to outcome-

based pricing "cannot happen overnight. For many, it is a journey that can take at least

18-24 months to implement." The buyer must have complete data, and the provider must

do an assessment of the buyer's landscape.

3. Measuring outcomes. Mara warns that companies in an outcome-based arrangement

must critically review service level agreements (SLAs) to ensure they align with the

desired strategic business outcome. "Most companies today are accustomed to SLAs that

measure activity and workflow steps, and those outputs are not necessarily aligned to

business outcomes."

4. 4. Risk-reward models. For the greatest and riskiest outcomes, buyers and providers

may need to employ a shared risk-reward model. Besides demonstrating a willingness to

"put skin in the game," this strategy incents the right behavior on both sides (including

enforcing a commitment to change) that can influence the desired outcome.

Impact on third-party advisory services

In contrast to the current trend of buyers infrequently using third-party outsourcing consultants to

help structure cost-based approaches in outsourcing, many buyers turn to expert third-party

advisors for help with outcome-based sourcing arrangements.

However, Mingee at ACS believes outsourcing consultancies will change as adoption of this type

of outsourcing increases. "Third-party advisors' experience has largely been in unit-based

sourcing," he explains. "I think they will need to evolve into areas of specialty, with outcome-

based sourcing as a specialty, or perhaps outcome-based approaches within towers or industries

as specialties. I am not sure exactly how it will evolve, but I believe this specialization and

verticalization will become more and more important relative to the use of third-party advisors."

Examples of structuring outcome-based services

ACS recently developed an outcome-based offering in healthcare communications. Here's an

overview of how the provider can originate this kind of an offering and how buyers will benefit

by adopting such an approach.

Buyers' business situation: (1) Demand on healthcare payers to communicate more

effectively with their members and with healthcare providers (such as hospitals and

physicians). (2) Healthcare reform and legislation will create more competition for

consumers, which will drive the creation of products and an added emphasis on creating

consumer "stickiness" for health plans. (3) The continued cost escalation of healthcare in

the U.S. economy is forcing health plans to look for new and different ways to create

value, including ways to monetize their existing infrastructure and operational assets.

The impact of the provider's capabilities and industry knowledge. Because of ACS's

expertise in the healthcare vertical, it recognized the following situations. (1) It could

help health plans extract new value out of the health plans' printing and communications

infrastructure. (2) It could also create value by reducing the insurance companies' biggest

communications cost factor: postage. (3) It could create additional new value by

integrating/converging the insurance companies' various customer service

communication channels for explanations of benefits and remittance advice.

Risk-reward model. The offering uses a shared risk-reward model to align and incent both

parties' behaviors in achieving the outcome. "A large part of our revenue only comes if

we successfully extract new value by reducing their postage spend," reports Mingee. He

says postage for a large national health plan may represent $70 million of a $100 million

budget in overall print and mail operations. In the past, insurance companies moved to

electronic communications but there was no incentive to control or shut down paper

communications, so they ended up paying for both. The risk-reward model enables

achieving the desired outcome.

The provider's investments. ACS has invested in infrastructure enabling an ecosystem

approach to communications, which would aggregate the communications of multiple

health plans and multiple healthcare providers, thus creating new value by further

significant cost reduction. Mingee says the provider's infrastructure investments plus its

vertical expertise will cause the healthcare communications market to "work together in

new and different ways to streamline processes and create new value by taking costs out

of the system."

BancTec also provides an outcome-based approach to document-centric processes. Paul

Diegelman, BancTec's Practice Manager of Finance and Accounting Optimization, describes its

"Inbound Services" offering as a "process-enriched structure for handling, processing, and

decisioning all incoming business documents in a manner that achieves balanced outcomes of

compliance, risk management, and client service in a long-term, jointly supportable business

case."

BancTec's approach leverages the synergies between document management and downstream

business processes such as F&A, HR, healthcare membership management, loan servicing, and

others. "The mailroom isn't just a place where mail is delivered -- it's the point of origin for many

key business processes that affect a client's working capital, customer relations, and

profitability," Diegelman says.

This more comprehensive end-to-end approach, which is platform based rather than based on

geographically dispersed labor, creates outcomes of reduced costs, reduced process friction,

faster time to resolution, and reduced risk through improved compliance with policies and

procedures.

The BancTec exec says, "The market has already begun to realize that these sorts of

opportunities exist, and adoption of this centralized, outcome-based approach for document

management and the resulting downstream business processes will accelerate within the next few

years, especially among the Fortune 1000."

The vision

Mara at HP comments that companies have found various sources of value through outsourcing

over the past few years; but, with outcome-based approaches, outsourcing comes almost full

circle to its original vision and value proposition.

Mingee points out that providers demonstrate their commitment by making substantial

investments in not only service delivery solutions, but industry knowledge and have acquired

demonstrable experience in the field. Providers are not just building platforms or enabling

infrastructure. Their knowledge and experience leverages the IT and delivery investments to

make outcome-based sourcing successful.

There is a saying that "life isn't about finding yourself, it's about creating yourself." Companies

that leverage an outcome-based approach to outsourcing over the next few years will have a new

competitive advantage from creating their own value in outsourcing.

Lessons:

Although some companies achieved outstanding results with outcome-based outsourcing

since 2001, this approach historically saw low adoption because of its challenges

regarding the required level of trust and visibility, measurement of outcome, and the

service provider's ability to impact influences on the outcome.

The next five years will see a greater adoption of outcome-based approaches to

outsourcing because of these catalysts and enablers:

o The necessity to create new value beyond labor arbitrage and ensure the value

aligns with the buyer's strategic business goals

o Providers' investments in developing vertical solutions, platforms, and other

enabling infrastructure, thus increasing their ability to impact outcomes

o Deeper level of partnering in relationships, which will impact trust and

collaboration and facilitate the provider's ability to influence outcomes

For the greatest and riskiest outcomes, buyers and providers may need to employ a shared

risk-reward model. This incents the right behavior on both sides (including enforcing a

commitment to change) that can influence the desired outcome.

Source: Outsourcing Journal, January 2010

Back to Top

The Impact of 2009 and the Predictions for 2010:

Top Providers weigh in

Experts share their sage assessments-

Impact of 2009:

ACS: The current downturn is deeper and broader than any since the Great Depression. It is

forcing governments and enterprises around the world to re-think how they conduct their

business. Enterprises that would never have considered outsourcing in the past are now re-

examining their options beyond the usual suspects of IT and data centers. For example, HR

functions such as finance and accounting are clear examples of corporate overhead they can

outsource.

Rebecca Scholl, Senior Vice President of Marketing and Communication

Dell Perot Systems: Passage of the American Recovery and Reinvestment Act. The ARRA-

funded incentives for physicians and hospitals to adopt electronic health records will increase the

use of outsourcing as they implement mission-critical applications.

Dr. Harry Greenspun, Chief Medical Officer, Dell Perot Systems

Everest Research Institute: Merger and acquisition activity in the outsourcing supplier market

accelerated, including increased combinations of hardware and services (Dell-Perot, Xerox-

ACS) plus consolidation plays in the contact center space.

Eric Simonson, Principal

HP: Going into 2009, the market expected a significant number of companies to sell their

captives to service providers due to deteriorating economic conditions. However, few companies

sold their captives because we believe companies are still failing to recognize their shared-

service model's lack of sustainability due to scarce investment funds, lack of core focus, and

limitations on their scalability.

Les Mara, Head of BPO EMEA

IBM: The economy triggered a number of events that impacted outsourcing. A broader group of

buyers began to reconsider BPO as a viable option to reduce costs, achieve greater outcomes,

and utilize flexible delivery models that can support them during market fluctuations. Buyers are

seeking strategic partnerships that enable them to accelerate transformation. We've seen

significant market interest, a stronger drive toward procurement sourcing/indirect spend, and an

increased focus on enterprise business outcomes.

Don Schulman, General Manager, Finance and Administration

Pinstripe: The credit and banking crisis and the subsequent lack of access to capital. The

resulting liquidity problems forced precipitous drops in business activity, but the silver living

was that some progressive companies actually saw the downturn as the best time to implement

strategic recruitment initiatives like HR and recruitment process outsourcing because of their

scalability, flexibility, and usefulness in controlling costs.

Sue Marks, CEO

TCS: In 2009 executives chose not to make decisions because of the economic recession. There

were significant drops in budgets, which impacted outsourcing volumes. Some processes like

collections did see a surge, but companies put major outsourcing decisions on hold; clients

managed volume surges through higher internal productivity. Abid

Ali, VP and Global Head, BPO Services and Process Excellence

Wipro: The economic woes and, in retrospect more than that, the indecision driven by

uncertainty as to how deep it would be and how long it would persist. On the positive side,

thanks to strong decisive measures, many enterprises exited the year with a higher degree of

confidence.

Lakshminarayana Lan, Chief Strategy Officer

Predictions for 2010:

ACS: The drive to maximize revenue and contain costs as the economy slowly recovers.

Executives don't want to re-visit the expenditures they had 24 months ago and risk their

company's future. They will relentlessly pursue improving their operation models. Outsourcing

will play a role here, like embracing cloud computing or economically viable green technologies.

Smart business leaders will emerge from the recession with a renewed focus on maintaining a

healthy balance sheet so they don't have to relive the horrors of the past year.

Rebecca Scholl, Senior Vice President of Marketing and Communication

CompuCom: The most impactful outsourcing event in 2010 will be the amount of churn

resulting from the changing landscape of service providers. Merger and acquisition activity,

niche providers exiting the business, tier-two providers moving up the value chain, crucial

changes in capabilities, and a greater need for true partnering from providers will create new

dynamics between providers and clients.

Ed Anderson, Chief Strategy Officer

Dell Perot Systems: Establishment of regulations around "meaningful use" in ARRA and

regulations around privacy/security, which will drive organizations -- especially in the healthcare

industry -- to outsource in order to meet very high standards.

Dr. Harry Greenspun, Chief Medical Officer, Dell Perot Systems

Everest Research Institute: The outsourcing industry's recovery will accelerate. The winners will

become clearer and prompt further consolidation, particularly in the offshore ADM sector.

Eric Simonson, Principal

Genpact: Buyers will evaluate alternative methods, such as Software as a Service or cloud

computing, for upgrading ERPs and other major applications. It took the emotional event of the

economic downturn to force CIOs to look at drastically different models. However, these

concepts may miss the hype period as many are still not ready for full deployment. Spot

solutions will explode in 2010.

Perry Santia, Senior Vice President, Business Development, Information & Technology

HP: We believe the continued maturation and increased analytical capabilities available in BPO

services will push more corporations with captive units to recognize the need for partnering with

proven providers.

Les Mara, Head of BPO EMEA

IBM: Further expansion and growth in the outsourcing industry due to the combined impact of

the economic climate and the maturation of the BPO industry. For outsourcing buyers, it's no

longer just about cost and labor arbitrage, but about enterprise business outcomes, a demand for

standardization, and greater connectivity with both their suppliers and their customers.

Don Schulman, General Manager, Finance and Administration

Infosys: Companies will continue to feel the recession's impact. Risk-transfer models, i.e.,

platform and outcome-based pricing, will continue to excite buyers. Offerings that enhance

revenue or offer insights into the business will see a higher degree of acceptance. Outsourcing

will continue to drive seismic shifts in procurement and will have the most impact on supply

chain initiatives. Technology intervention in processes and vertical play will continue to see an

upward trend in adoption.

Ritesh Idnani, Vice President and Head, Global Sales and Marketing

Kofax: The level of U.S. government incentives. There will be incentives for firms to provide

nearshoring capabilities and increased activity in the United States for outsourcing services. That

will impact the way the major outsourcing firms offshore will react and invest in the United

States. It also will stimulate growth and investment by domestic firms to create BPO services in

the United States.

Andrew Pery, Chief Marketing Officer

Oracle: The economy will continue to put pressure on IT organizations, leading to more pressure

to transform IT. Cloud computing is a hot topic on every CIO's mind. Mark Schwarz, Senior

Vice President and Leader of the Oracle On Demand business

Pinstripe: As the economy recovers, there will be increased employee turnover. Jobs will not

necessarily come back where they were before, geographically or organizationally. There will be

more supplier churn than normal. We will finally see a pent-up demand for infrastructure

because of the lack of investment in 2008 and 2009.

Sue Marks, CEO

TCS: Buyers will be clear about their business strategies. This will result in a lot of pent-up

internal demand; when growth is back and volumes pick up they will outsource to handle the

additional demand. That is likely to have a positive impact on the outsourcing industry.

Abid Ali, VP and Global Head, BPO Services and Process Excellence

Wipro: We see a gradual improvement in economic conditions. Enterprises will continue to

focus on cost transformation but will add business transformation to their agendas as well.

Variability in cost, flexibility to adjust to the changing environment, and virtualization in

operations will be the core focus.

Lakshminarayana Lan, Chief Strategy Officer

Source: Outsourcing Journal, January 2010

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Events & Reports

Webinar-Location Assessment: Perception and

Reality for Global Businesses Services Outsourcing is one of the fastest maturity curves modern industry has ever witnessed.

Geographies play a most critical role in operational delivery and success of the services

outsourcing initiative; hence location assessment is of paramount importance. Moreover, due to

rapidly changing landscapes, it becomes extremely difficult for "perceptions" to keep pace with

the perpetually-shifting "realities" of these fast-emerging and dynamic Centers of Excellence.

Global Services & Tholons have tracked both the perceptions and realities of how location

assessment has evolved for services outsourcing. Following the release of their fourth edition of

Top 50 Emerging Outsourcing Destinations Study - they track this evolution with a webinar

titled "Location Assessment: Perception and Reality for Global Businesses."

Date: Friday, January 15, 2010

Time: 11:00 AM - 12:00 PM EST

Visit- https://www1.gotomeeting.com/register/552636456

Europe Overtaking North America as Top

Outsourcing Region: TPI Report

TPI has released data which shows that through the first three quarters of 2009, Europe surpassed

North America as the leading region in the world for outsourcing spending by Global 2000

companies and is on track to end the year as the highest-spending region for the first time.

According to the TPI "Momentum Market Trends & Insights 3Q'09 Geography" Report,

European Global 2000 companies outspent their North American counterparts by approximately

$1.2 billion in average annual contract value (ACV) through the third quarter. North America,

which led the world in outsourcing spending by G2000 companies in 2008 with $29.6 billion in

ACV versus $28.7 billion for Europe, looks poised to miss that mark this year and lose its top

spot.

"Understanding the global outsourcing market requires up-to-date information on local and

regional dynamics in every part of the world," said Melany Williams, Partner and Managing

Director, TPI Momentum. "This Report offers on-the-ground detail and analysis by TPI experts

and advisors to help service providers and others identify and pursue the most promising

opportunities - wherever they might lie."

For each of the six regions, the Report analyzes contract trends, delivery center activity and

business and political developments that impact the sourcing industry. Twenty-nine individual

country profiles provide more detailed information about the sourcing climate within key

markets, including changes in size, opportunities for future growth and penetration rates of

service providers.

The Report also introduces a new research methodology, the TPI Outsourcing Viability Index,

which compares the strengths and weaknesses of 115 countries on the key attributes that service

providers look for when deciding where to establish a service delivery center, including

Education & Workforce, Infrastructure & Technology and Political and Economic Stability. TPI

designed the Index based on its experience evaluating service delivery locations for hundreds of

outsourcing buyers.

Among the notable results from the TPI Outsourcing Viability Index:

North America and Europe dominate the rankings, with the United States and Canada at No.1

and 3, respectively, and six European countries making the top 10--the United Kingdom (2),

Germany (4), the Netherlands (6), France (7), Switzerland (9) and Denmark (10).

While other markets are growing slowly but steadily, India (13) and China (21) have experienced

a rapid rise in spending among their G2000 companies, with China's market growth appearing to

lag India's by about two years. Both countries were rated among the top 10 on the Sourcing

Environment dimension.

Brazil (24), the highest-ranked country in Latin America, also made the top 10 for Sourcing

Environment. The Report found that Latin America is home to the fourth-highest market

opportunity among the regions with $3 billion in additional ACV potential.

Source: TPI, December 2009

Procurement Outsourcing -- The Next Major BPO

Growth Area?: More hype than fact per report by

Ovum

"The procurement outsourcing market has been described as being on the verge of major

expansion a number of times in recent years, yet the promised boom has yet to happen," said Ed

Thomas, analyst at Ovum and author of this report. "However, there remains a great deal of room

for growth in the market and Ovum expects it to increase in size at a steady, if unspectacular, rate

over the next five years."

The procurement outsourcing market has a unique competitive landscape, said the research

house, adding that it is dominated by four market-leading vendors: two outsourcing giants (IBM

and Accenture) and two procurement specialists (ICG Commerce and Ariba).

The other vendors operating in the sector can be split into two broad categories: vendors with a

sourcing background and vendors with a transactional process background, according to Ovum.

The main goal for the vast majority of procurement outsourcing providers is to be able to offer

clients an end-to-end service, from sourcing through purchasing to payment, in an effort to

compete effectively with market leaders IBM and Accenture, the analyst firm said.

For vendors with a sourcing background, this means growing their capabilities around

transaction processing and, in many cases, expanding their presence in low-cost locations, while

for those firms with a transactional process background, it means attempting to gain domain

expertise around sourcing functions, Ovum noted, adding that partnerships enable vendors to

address gaps in their offering, and have long been popular in the procurement outsourcing space.

"Service offerings cannot always be expanded organically, and partnerships offer a way of

gaining access to key skills without the cost or disruption associated with acquisitions," said

Thomas.

Indirect spending -- the amount spent on goods and services that enable a company to operate --

remains the primary focus of most procurement outsourcing deals, said Ovum. As the majority of

indirect spending categories are applicable to almost every business, vendors are able to operate

across vertical markets, Ovum added.

"Nevertheless, certain industries, notably manufacturing and consumer packaged goods (CPG),

have been at the forefront of procurement outsourcing adoption", said Thomas. "Since 2008,

there have also been signs of growth in other vertical sectors, including financial services,

telecoms and pharmaceuticals".

Ovum expects to see significant procurement outsourcing activity in the energy and retail

markets over the next two years, the research firm concluded.

Source: Ovum, December 2009

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