(Published in Business World under the View from Taft column, June 18, 2009)
Amid the mixed forecasts on the global economic rebound, experts on the outsourcing and offshoring industry are consistently painting a rosy picture toward the end of the year. According to the 2009 edition of the Black Book of Outsourcing, more than half of companies polled say they expect their spending on outsourcing services to come back and return to pre-recession levels.
Similarly, a Business Processing Association of the Philippine (BPA/P) survey among industry players showed that 96% of respondents representing organizations that provide non-voice Business Process Outsourcing (BPO) services believe that 2009 prospects for their organizations are good, excellent, or outstanding. More than half of the respondents, 51%, said prospects are excellent.
All these forecasts bode well for the local industry, but more likely than not, the industry will never be the same after the global slump that we are experiencing. I forecast three major directions where the global as well as local outsourcing and offshoring industry is headed:
1. Governance will become a major criterion for outsourcing vendor selection and a competitive advantage among players
With Satyam’s CEO falsely boosting the company’s earnings numbers in January 2009, and the recent ban of Wipro in doing business with the World Bank, the corporate governance crisis in the outsourcing sector deepened. These incidences made clients think twice before contracting with vendors.
After the post-Indian governance crisis, clients all over will be taking a more stringent stance on making governance, especially corporate and operating governance, a major criterion in outsourcing provider selection. From the vendor’s side, a good governance practice will become a competitive advantage to close more outsourcing contracts. With these in mind, more established and governance-focused outsourcing vendors should prepare to capitalize on the rise of similarly governance-focused clients.
Local and medium-sized outsourcing providers will need to adopt stricter and more comprehensive governance structures and practices to compete with the bigger and more established players.
2. Strategic companies that focus on innovation will prosper
There has been much discussion in the BPO industry that companies that move up the outsourcing value chain are able to win and retain more clients and improve profitability. However, playing in this higher value chain, i.e., the knowledge process outsourcing (KPO) space, such as financial analysis or engineering outsourcing is not a guarantee for success. What is more critical is that BPO players need to continually innovate on all fronts.
In fact, a 2005 McKinsey Study strongly advised that the Indian IT-BPO sector can generate over US$10-15 billion of additional revenues by 2010-over and above its $60-billion export target — provided it makes innovation its chief growth catalyst. Moreover, a 2005 IDC survey among BPO clients in the US suggested that 35% of the respondents look for BPO providers to drive innovation.
Innovation among outsourcing providers may come from three fronts: business model innovation, which entails significantly changing the structure and/or financial model of the business; services/markets innovation, which entails creating new or significantly differentiated services or go-to-market; and operations innovation, which involves improving the effectiveness and efficiency of business processes.
The industry is replete with examples on award-winning innovative BPO players, from Evalueserve to Genpact As we witness a slowdown in outsourcing activities amid recession, innovative companies will take advantage of the slower pace and strengthen their business models, service deliveries, and operations through innovation.
Local BPO players will need to incorporate innovation initiatives in their strategic planning process. They will also need to develop a culture of innovation that rewards creative and innovative ideas.
3. Outsourcing providers will consolidate to take advantage of economies of scale and specialization
Stronger outsourcing customers will take advantage of the tougher marketplace and demand higher levels of service at a lower unit cost. Hence, vendors will be forced to consolidate through mergers and acquisitions. Weaker competitors, in order to survive, will get absorbed by strongers companies, while others will be forced out of the playing field.
As a result of the global financial crisis, a wave of consolidation is already taking place in the financial services and insurance BPO. Economies of scale and breath of service in specific vertical industry knowledge, e.g. insurance, will be the key drivers for consolidation. Large BPO players will absorb niche players to complete the full value chain in a vertical industry. Consolidation is also taking place on a horizontal level, e.g., contact center services and human resources outsourcing, to capitalize on specialization and economies of scale.
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Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of the Graduate School of Business, De La Salle University. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.
Amid the mixed forecasts on the global economic rebound, experts on the outsourcing and offshoring industry are consistently painting a rosy picture toward the end of the year. According to the 2009 edition of the Black Book of Outsourcing, more than half of companies polled say they expect their spending on outsourcing services to come back and return to pre-recession levels.
Similarly, a Business Processing Association of the Philippine (BPA/P) survey among industry players showed that 96% of respondents representing organizations that provide non-voice Business Process Outsourcing (BPO) services believe that 2009 prospects for their organizations are good, excellent, or outstanding. More than half of the respondents, 51%, said prospects are excellent.
All these forecasts bode well for the local industry, but more likely than not, the industry will never be the same after the global slump that we are experiencing. I forecast three major directions where the global as well as local outsourcing and offshoring industry is headed:
1. Governance will become a major criterion for outsourcing vendor selection and a competitive advantage among players
With Satyam’s CEO falsely boosting the company’s earnings numbers in January 2009, and the recent ban of Wipro in doing business with the World Bank, the corporate governance crisis in the outsourcing sector deepened. These incidences made clients think twice before contracting with vendors.
After the post-Indian governance crisis, clients all over will be taking a more stringent stance on making governance, especially corporate and operating governance, a major criterion in outsourcing provider selection. From the vendor’s side, a good governance practice will become a competitive advantage to close more outsourcing contracts. With these in mind, more established and governance-focused outsourcing vendors should prepare to capitalize on the rise of similarly governance-focused clients.
Local and medium-sized outsourcing providers will need to adopt stricter and more comprehensive governance structures and practices to compete with the bigger and more established players.
2. Strategic companies that focus on innovation will prosper
There has been much discussion in the BPO industry that companies that move up the outsourcing value chain are able to win and retain more clients and improve profitability. However, playing in this higher value chain, i.e., the knowledge process outsourcing (KPO) space, such as financial analysis or engineering outsourcing is not a guarantee for success. What is more critical is that BPO players need to continually innovate on all fronts.
In fact, a 2005 McKinsey Study strongly advised that the Indian IT-BPO sector can generate over US$10-15 billion of additional revenues by 2010-over and above its $60-billion export target — provided it makes innovation its chief growth catalyst. Moreover, a 2005 IDC survey among BPO clients in the US suggested that 35% of the respondents look for BPO providers to drive innovation.
Innovation among outsourcing providers may come from three fronts: business model innovation, which entails significantly changing the structure and/or financial model of the business; services/markets innovation, which entails creating new or significantly differentiated services or go-to-market; and operations innovation, which involves improving the effectiveness and efficiency of business processes.
The industry is replete with examples on award-winning innovative BPO players, from Evalueserve to Genpact As we witness a slowdown in outsourcing activities amid recession, innovative companies will take advantage of the slower pace and strengthen their business models, service deliveries, and operations through innovation.
Local BPO players will need to incorporate innovation initiatives in their strategic planning process. They will also need to develop a culture of innovation that rewards creative and innovative ideas.
3. Outsourcing providers will consolidate to take advantage of economies of scale and specialization
Stronger outsourcing customers will take advantage of the tougher marketplace and demand higher levels of service at a lower unit cost. Hence, vendors will be forced to consolidate through mergers and acquisitions. Weaker competitors, in order to survive, will get absorbed by strongers companies, while others will be forced out of the playing field.
As a result of the global financial crisis, a wave of consolidation is already taking place in the financial services and insurance BPO. Economies of scale and breath of service in specific vertical industry knowledge, e.g. insurance, will be the key drivers for consolidation. Large BPO players will absorb niche players to complete the full value chain in a vertical industry. Consolidation is also taking place on a horizontal level, e.g., contact center services and human resources outsourcing, to capitalize on specialization and economies of scale.
****
Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA Program of the Graduate School of Business, De La Salle University. He may be e-mailed at rlugtu2002@yahoo.com or visit his blog at http://rlugtu.blogspot.com.
Comments
India and China, regardless of governance, continue to be powerful players in the Non-voice segments, e.g. IT, transcription. Large voice projects left India due to the customer service ruckus of US consumers not wanting to deal with anyone sounding East Indian. China's call center is still on its trying stages. Other southeast Asian countries have their niches but, still, the Philippines dominates the place where North American businesses outsource to.
So, let's leverage on our strengths, upgrade our populace with the right skills while creating venues to slip into the non-voice outsourcing niches.
And, I still believe opening our doors to the free market, e.g. 100% foreign investment as what Malaysia has just recently done, may shock us initially but reap our due benefits along the way.