As we build-up to 2012, Q4 2011 has a very similar feel economically to Q4 2008, which will potentially have major implications for outsourcing next year with similar business pressures being experienced in 2012 to those felt in 2009.
So what are the parallels and differences between 2009 and 2012 and what implications does this have for the outsourcing industry in 2012?
Well firstly, the economic pressure in Q4 2011 is coming from a different geography, this time the Euro zone, rather than the U.S. However, in both cases, the result is a slowdown in economic growth globally, with the mature economies such as the U.S. and Europe hovering around the point of recession, and a slowdown, though still high single-figure GDP growth, in the emerging economies.
This has implications both for the geographic emphasis of the outsourcing vendors and for the approaches taken to outsourcing in the various geographies. In particular, it was noticeable in 2009 that the outsourcing vendors, predominantly for the first time, began to target seriously the emerging country domestic markets with a particular emphasis on the Indian domestic market and the growth emerging out of the Middle East. Clearly the nature of this demand is different from that in the mature geographies and is about bringing best practice processes, people and technology to support high transaction growth. The emphasis is less about labour arbitrage with service delivery typically in country or region, though this trend is encouraging the development of delivery capability outside the established centers. This acceleration in use of BPO and outsourcing in “growth markets” will continue apace in 2012 as vendors seek to inject growth beyond that available within the depressed mature economies.
In the mature economies, the focus is returning even more strongly to cost reduction and to aligning cost structures with business volumes while minimizing client investment. This leads to contracts that are more about quick wins with a 12-month or lower payback time, than massive end-to-end process transformations. Clients are also seeking contractual flexibility that enables them to scale up in those parts of their business where growth is occurring and to scale back the number of FTEs in areas where levels of business and transactions are declining.
However, while an economic slowdown places a greater need on organizations for process excellence and reduced process costs, and organizations typically recognize this, it also enhances all the main inhibitors to BPO and outsourcing i.e. uncertainty regarding the shape of their future business and levels of demand together with increased difficulty in providing the executive time and investment needed to carry out the deal and undergo transition. There is also the added pressure not to impact service quality, as often happens immediately post transition, at a time when the business may be in a state of fragility. So, contrary to expectation, business process outsourcing in order to flourish needs some level of short-term stability, if only to free up the management bandwidth necessary for adoption. In addition, if organizations are seeking immediate impact i.e. with the next 6-months, then levers such as office closures and redundancies have much more rapid effect than BPO. Organizations in these circumstances typically recognize that they have a requirement for BPO to assist them in moving to more standardized processes and to process excellence but BPO remains essentially a medium-term, rather than a short-term, cost lever, which reduces its adoption in times of significant economic stress.
In addition, the continuing emphasis on cost reduction from key markets such as the U.S. combined with wage inflation and staff attrition in India and China will lead vendors to enter new lower cost locations moving to parts of India for example which have yet to experience BPO and may deliver both lower cost and greater employee loyalty.
At the same time, political pressure in the U.S. will lead vendors to offer a greater range of onshore options, again using new lower cost locations where possible, with HCL’s introduction of “socially-responsible” outsourcing an example of this trend.
In addition to the economic forces at work, there are also technology forces impacting the level and manner of outsourcing adoption. Chief among these are cloud and social media.
Surprisingly enough, both of these factors are having a positive impact on the level of demand for BPO while within IT outsourcing cloud is having a positive impact on niche application adoption through SaaS but on the whole a negative impact on the adoption of large-scale IT infrastructure management services.
As discussed above, the economic environment in the mature economies is generating a need for quick wins, leading in many cases to smaller, shorter BPO contracts. Here cloud and social media technologies come into their own, with organizations able to use BPaaS services in conjunction with their core processes and core technologies for example to enhance their ability to apply more sophisticated collections strategies and improve their DSO or use specialist P2P technology to reduce the numbers of screens used by agents in a given transaction and improve the take-up of early payment discounts. In practice, there are many sub-process areas where BPaaS can be use both to augment existing core systems and processes and to implement new “edge” processes where there has been little formal process and technology in the past.
Similarly, social media services also offer a means of achieving a “double benefit” by simultaneously offering customer service cost deflection and improved customer satisfaction. In particular, social media can be used to both proactively identify issues as they arise and to resolve these through multi-channel outbound notification. It can even be used as a partial means of crowd-sourcing, involving an organization’s customers in its sales and customer service efforts.
Accordingly, NelsonHall expects to see a significant rise in the use of BPaaS to tackle sub-process optimization both within core processes and to support new emerging requirements, and in social media in sales & customer service process optimization. Overall there will be a greater emphasis within BPO in 2012 in maximizing value from existing customer bases, with the emphasis on cross-selling and up-selling continuing to increase within BPO contracts.
So what impact is cloud having on IT outsourcing? In 2012, it will continue to inhibit the adoption of large-scale IT infrastructure management contracts, since organizations are still typically working out what cloud means to them. Typically organizations are still not ready to adopt out-and-out public cloud for production applications, with the preferred approach being a gradual move towards hybrid cloud with public cloud being adopted in support of storage in areas like e-commerce and customer relationship management which are both customer-facing and have volatile levels of resource usage. But as in BPaaS, cloud will encourage use of SaaS for niche applications.
So overall what does NelsonHall expect to see in outsourcing in 2012:
Single digit growth in the mature economies with an emphasis on quick sub-process wins rather than major transformation, with double-digit growth in the emerging and growth economies
Increased acceleration to new lower-cost delivery locations both onshore, to meet branding and political pressures, and offshore to re-establish high levels of labor arbitrage
Increased adoption of BPaaS, both embedded within existing end-to-end services and also increasingly in standalone form, and SaaS in ITO
Continuing emphasis on certainty of outcome in short timescales within the mature economies with process benchmarking and roadmaps key factors in establishing certainty of outcome.