Outsourcing predictions for 2008
From India to Eastern Europe what are the key outsourcing factors to consider
By Stephanie Overby CIO.com | Published 08:15, 19 December 07
5. Flight from the big cities
In India and beyond, outsourcing hot spots have become over saturated, so many providers and customers are looking to set up shop elsewhere. Call it the exodus to the tier-2 cities and expect to see more of it in 2008.
The Indian economy overall is growing at 9% a year. A shortage of talent is emerging in the top cities across India, local universities are no longer providing an adequate number of qualified candidates, and recent tier-1 city grads are increasingly wary of starting at the bottom on the graveyard shift because they've got other options, according to neoIT. That's creating movement into smaller, less saturated cities.
And India is not alone. Monterrey, Mexico, for example, is projecting a shortfall of software engineers in 2008. And the same story is occurring in dozens of outsourcing hot spots around the world.
As a result some IT service providers are jumping to second-tier cities from the get-go, in an attempt to sidestep the rush to set up shop in a major metropolis.
"You can take some of the best practices from India and look at second-tier cities to set up a large centre," says Juan F. Ferrara, chief operating officer for the Americas for India-based IT service provider Genpact. "You're already seeing that in Brazil and Argentina...where [companies] are already in second- and third-tier cities."
6. The new, new sales pitch: Transformation
Forget cost cutting and efficiencies. Outsourcers are going to pitch themselves as partners in business transformation. Think you've heard that before? You have.
But this time they mean it. So say the experts. Customers want more than cost savings. They want access to great talent, vertical expertise, process maturity, flexibility, the great and powerful "value add". IT buyers want an outsourcing provider who can actually enhance the client's revenues and not just their own, says PA Consulting. So if vendors want to keep attracting those clients, they're going to have to pony up.
"All companies are realising that an IT outsourcing contract is valid for about as long as it takes the ink to dry on the signature page," says Shawn Fields, vice president of managed services at Optimus Solutions.
"Vendors who understand this and build flexibility into their contractual structure that allows their clients to change services will find themselves distancing their companies from their competitors. Innovation will emerge as a deciding factor for ITO [IT outsourcing] competitors."
Even in areas that are typically cost-centric, like offshore application development and maintenance, the emphasis will shift pure labour arbitrage projects to higher-value work such as process improvement and application portfolio rationalization, according to the Everest Research Institute.
The catch is, of course, you'll have to pay more. Just like we told you. Forrester notes that rates for consulting services are already on the rise, and warns that IT service buyers can expect to spend more on outsourcing services in 2008 while deciphering which market changes warrant the upcharges and which don't.
7. Remote infrastructure management (RIM) grows up
Remote infrastructure management (exactly what it sounds like: managing servers, databases, networks and security, and applications from offsite) has been possible for several years. But next year may be the year when buyers really grasp this alternative to infrastructure outsourcing.
These asset-light deals-so called because the provider does not take on the assets such as the client's data centres or desktops as part of the contract-will increase as clients get used to the idea that the "command and control" centre can be physically removed (and in the case of this largely offshored RIM option very far removed) from the physical data centre.
To date, this segment of the outsourcing market has been growing at about 20 percent a year, according to neoIT. The Everest Research Institute predicts the RIM market will pick up to the tune of 60 to 70% growth in 2008. Besides increasing comfort levels with the RIM concept, neoIT also suspects that an economic downturn in the US could fuel greater demand for the lower-cost infrastructure outsourcing option.
And the transitions can happen on the fly: most datacentres and network operating centres (NOCs) are managed with a common set of tools, service providers already possess operational expertise in them, and adaptation to any client-specific needs can happen relatively quickly, says neoIT.
Asset-light deals could be a boon for IT service providers, as the profit margins are better than the traditional infrastructure outsourcing model. However, there is a downside for vendors. An asset-light deal brings in about 70% less in total contract value to the provider than the traditional, assets-included deal, says Everest Research Institute. Net result: better profit margins, but less top-line growth. But, experts say it's the way of the future. As a result, traditional infrastructure outsourcing will itself show a decline... but not until 2010, says Everest.
