There is no denying that the environment is fairly turbulent. When there is uncertainty, capital investments get impacted. Pricing pressure will thin out service providers’ margin. This will in turn force service providers to come up with newer customer-centric solutions and innovative engagement models.

Arvind Thakur CEO, NIIT Technologies Ltd. articulated, “Both for the IT as well as the BPO industry, I do not anticipate there to be budget cuts because we are seeing renowned focus on outsourcing. The cuts really would be on capital investments and not on operating expense related activities.”

As per Thakur, three types of actions will hit the investment front. One would be just to keep the business running; this one would be budgeted for. Then, there may be certain strategic initiatives -such as moving to a new platform- that makes the business more competitive. This one would be planned and also budgeted for. And then, there would be activities that independent businesses may feel appropriate to invest in. Here, the funding would be sought for from the user itself.

IT Spending $2.7 Trillion in 2012

Gartner predicts that IT spend is projected to total $2.7 trillion in 2012. The slowdown in US and Europe economic growth could suppress IT spends. According to Forrester Research, IT spends are expected to decrease to 5.5 percent in 2012 for a total of $2.15 trillion, from estimated growth of 11 percent in 2011.

Emerging economies such as India will account for $1.013 trillion. According to Gartner, the telecommunications market is the largest IT segment in India with IT spending forecast to reach $54.7B in 2012 followed by the IT services market with spending of $11.1B. The computing hardware market in India is projected to reach $10.7B in 2012 while software spending will total $3.2 billion.

Buyers are increasingly trying to consolidate their IT services as portfolio and thereby arrive at cost savings. Chirajeet Sengupta, research director, Everest Group voiced, “Instead of having a multitude of contracts spread all over the world, with a variety of service providers, buyers are increasingly trying to consolidate their portfolio and implement global contracts with uniform standard SLA. This leads to a fair amount of centralization of spends and consequently cost savings for the client.”

Sengupta believes Infrastructure Outsourcing is one of the areas where we can expect to see a change, as there is a steady increase in offshoring. Traditional onshore infrastructure support services are going to go down. This entire wave of consolidation will evolve a fair degree of system integration, process improvement and process optimization. These three are some of the areas that are expected to go up.

In addition, enterprise mobility, cloud computing, managed services, machine-to-machine communications, product engineering service are some of the areas that will witness growth.

Even though there have been major concerns around the macro economy over the past year, it is still very difficult to envisage any significant budgetary cuts from the customer standpoint going into 2012 and beyond. “At worst, budgets might remain flat as customers offset the need for a technology refresh arising out of exponential data growth, security and compliance concerns by embracing fast emerging delivery models like virtualization, cloud computing and unified communications. The transition towards an ‘As a Service’ IT economy has surely gained momentum in the year gone by and is certainly the future of IT services and solutions,” said Brian J Manning, president and managing director, Computer Sciences Corporation India (CSC).

Significant increase in IT spends in outsourcing are likely to come from emerging companies and economies. These companies and economies have matured to a level where they can significantly upgrade their IT infrastructure or want to get there soon enough by leveraging best in class IT.

In Q1 2012, 350 companies are expected to invest more than $1B in IT. The main reason behind this is they comprehend that IT impacts their business performance and that there are many benefits to by spending on moving applications to the cloud.

While innovation is the buzz word, R&D spendings are expected to be scrutinized. Sanjay Dhawan, president and CEO, Symphony Services Corp. opined, “Research and Development spendings may come under pressure. Having said that, the pressure to innovate and introduce new products has never been higher.” He expects customers to look for help from their outsourcing partners in three ways:

1. Taking over mature products to drive down costs and add enhancements to extend the lifespan, and using those savings to fund new products and initiatives;
2. Improving automation through new cloud-oriented processes and tools also unearths product development life-cycle savings that can be used to fund new initiatives;
3. Delivering new product frameworks (software and hardware) to shorten time and cost to market for new solutions
In the end, as Everest Report titled 2012 Market Predictions pointed, “Larger buyers will continue to drive the spending budgets in both infrastructure outsourcing and ADM, and will focus on vendor consolidation, providing growth opportunities to larger players, both offshore and MNC. This will lead to further growth disparity between large and small suppliers IO deals will increase, driven by next generation models such as cloud computing and RIMO.”

BPO: Win-Win Situation for Both the Customers and the Vendors

At the onset of the downturn, many organizations had put new projects on a pause; now most of them are looking at a long-term outsourcing strategy. Recently, HGS won a big public sector contract in the UK. The contracts are expanding to include more service lines. Financial services institutions will move towards lesser and more strategic relationships with service providers, resulting in longer contract terms and larger contract sizes. The focus is not as much on decreasing costs as it is on increasing efficiency. Partha De Sarkar, CEO, Hinduja Global Solutions (HGS),said, “This will translate into a bigger average contract size in the coming years. Driven by the imperatives of the austerity measures, there may be a significant increase in outsourcing spends by government bodies in Europe.”

Unlike IT, BPO is more of an ongoing expense not a discretionary expense. Companies will continue to look for ways to cut costs out of their operations. Rajesh Ranjan, research director, Everest Group, enunciated, “Most of the organizations are going to look for a balance set of outcome. Balance set of outcome means taking a decision that will help realize some of the short term objective, without compromising on long term benefit. In fact, I am expecting organizations to take those decisions that while helping them realize short-term objectives will create a foundation for the long term success. This is also a mark of reflection of the maturity of BPO.” 

Earlier buyers approach revolved primarily around cost cutting without due consideration on the long term perspective. Or there were wholesome transformation approach where it would take 2-3 years to start seeing some benefits. Ranjan thinks neither of these has really provided the right set of value. Most of the organizations as we move forward are going to look for balance set of outcome.

Neil Bentley, founder and managing director, Active Operations Management India(AOMi)feels headcount is expected to come under pressure as a large part (over 70 percent) of controllable cost in BPOs is associated with staffing. However, in cases where deals have already been struck there may be zero incentives to reduce head count; in transaction-based deals the scenario may be different.

“Companies seeking to make budgetary cuts may well turn to BPO as an option - maybe even some operations that have never previously considered the option such as parts of the public sector. This may lead to some growth in BPO but with it would come competition and pressure on price and service delivery. The successful BPOs would therefore be the ones that stand out as being able to offer the most competitive package - price plus assurance of delivery,” added Bentley.

Sitel is seeing a significant cost-savings opportunity for global call center BPO providers to achieve optimal operational efficiency by transitioning from on-premise legacy systems to cloud-based call center offerings that scale as a direct operating expense. This will also open the door for companies to replace large, captive operations with faster and cheaper outsourced operations, particularly in areas where customer experience can be enhanced by specialists.