Experts are predicting a major shake-up in the outsourcing market, as contracts worth billions of dollars come up for renewal in the next two years. What does that mean for CIOs?
First, there will be opportunities to sign money-saving deals as large U.S. consulting firms and global upstarts compete for business.
CIOs can also expect a more complex outsourcing landscape as companies follow the growing trend to spread outsourcing business among multiple providers -- a best-of-breed approach.
Experts are advising CIOs to take a number of steps to prepare for a new marketplace, including building a common technology architecture and set of rules that all providers must follow. The important thing for CIOs to remember is that outsourcing requires more, not less, management.
"CIOs need to start from a top-down strategy: Why are they outsourcing, what are they outsourcing, which pieces are best suited to a low-cost provider, and which require more strategic consulting help," said Lance Travis, an analyst at Boston-based AMR Research Inc. Also, Travis said, it's time for CIOs to acknowledge that anyone who says "outsourcing allows you to reduce management focus is wrong."
EDS and IBM hold $50 billion of those contracts. But as companies -- think General Motors and ABN Ambro -- move to a best-of-breed approach, spreading large monolithic contracts over multiple providers, and as Indian companies add capabilities, the kings of outsourcing are in danger of being dethroned.
"In the past, an IBM or EDS could get a big multi-$100 million contract where they have had real strength in 50% of it and be OK in the other 50%. Now, they are not going to get that 50% -- where they are only OK," AMR's Travis said.
That sort of pressure is pushing the Big Six to think about shifting their services to "a more balanced global delivery model," Travis added, by consolidating with another major company and/or acquiring an Indian provider. (Rumors are rampant that IBM is interested in Satyam Computer Services Ltd., despite denials from both companies.)
To take advantage of the shifting outsourcing marketplace, Travis recommends CIOs set up a program management office and use a blended portfolio approach that would include two or three of the Big Six companies, the top Indian companies and niche players for other contracts. He also suggests looking beyond India to countries where companies may be looking to do business for other contracts.
Forrester Research Inc. analyst Julie Giera agreed that the outsourcing market is heading for a shake-up, but said she doesn't believe its impact will be limited to the Big Six or will be fixed by splitting large contracts into smaller ones among multiple providers.
"The problem is that most outsourcers, even the Indian offshore guys, approach a customer with a one-size-fits-all outsourcing model," Giera said.
"Here's the service, here is your service level, and here is your price," Giera said. "The business model is broken. The classic outsourcers, like an IBM or EDS, have been writing fat profit margins into that contract far too long." By not adapting to customers' changing needs, she added, they have opened up opportunities for Indian firms.
What needs to happen, she said, is something Forrester is calling "adaptive sourcing," an outsourcing offering for IT and Business Process Outsourcing that evolves, or "flexes," as the customers' needs change over time. Unless the business model changes, Indian offshore outsourcing is a "stopgap" solution. With the maturing of global networks, service-oriented architecture and the growing arsenal of remote managing tools, outsourcers can change the way services are packaged, delivered and priced over time, Giera said.
Her advice for CIOs?
First, make sure you are calling the shots. "Sourcing strategy should be based on a common framework that the providers fit into, not the other way around," she said. Start building a technology architecture and set of rules now by which all your service providers will play.
Insist on a flexible contract structure that allows for changing delivery models, using offshore when appropriate and onshore help when that is required. A last word of caution: "Don't go too crazy with multi-sourcing things," Giera advises, pointing out that every one of your outsourcing agreements costs between 3% and 6% of the contract size to manage.