Tuesday, November 4, 2008

Taking a Reality Check on Today’s Sofware Outsourcing Company Market

There are many verifiable facts about the global information
technology and business process outsourcing (ITO/BPO) market.
It is a multi-hundred billion dollar market. It is a growing market
in terms of the number and total volume of deals and the
number and size of service providers serving the market. If
through no other means, the magnitude of the outsourcing
market and its growth levels are verifiable by reviewing the
fi nancial performance levels of the publicly traded service
providers.
Whether or not outsourcing is “delivering on its promises” or
users of outsourcing are satisfied is more difficult - though by
no means impossible - to measure. Between the last quarter
of 2004 and the first quarter 2007 EquaTerra has conducted
eleven market studies that assessed buyers’ outsourcing usage
and satisfaction as well as their future outsourcing investment
plans.

The market assessments primarily focused on buyers that
had undertaken multiple process outsourcing and were of a
minimum size of $100M revenue or 1,000 employees, though
in most cases the studies focused on much larger organizations.
Most studies also included only respondents that were director
level or above and were involved in the outsourcing decision
making process. During that same time frame EquaTerra also
conducted 10 iterations of its quarterly EquaTerra BPO/ITO
Pulse surveys. In short, the studies have been numerous,
comprehensive, and targeted to respondents whose opinions
matter most when it comes to assessing the software outsourcing company
market.
Across all of these studies, buyer satisfaction with outsourcing
remained positive, or above the norm (i.e., buyers were always
more satisfi ed than dissatisfied), though there was room for
improvement:
• A 2005 study of 200 BPO users found that 96 percent were
moderately (55 percent) or highly satisfied (41 percent) with
their efforts.
• The same study found that 73 percent of BPO users felt that
efforts had enabled process improvement.
• A 2006 study of 289 ITO buyers found that 82 percent
ranked themselves as being satisfied or verysatisfi ed with
their efforts.
• A 2006 study of 200 buyers across seven BPO categories
found satisfaction levels ranging from 6.5 (call center/CRM)
to 7.8 (R&D/pharmawork) on a one to ten scale where one
was not at all satisfied and ten was very satisfied.

Two 2006 studies, one with 310 respondents and one with
113 respondents, assessed satisfaction levels in the following
fi ve functional outsourcing areas: IT, finance and accounting,
human resources, procurement and call center. One on a one
to fi ve scale, with one being not at all satisfied and five being
very satisfi ed, satisfaction levels ranged from 3.13 to 3.40. In
the study of 113 outsourcing users, satisfaction levels with the
outsourcing service providers employed averaged 3.48 on the
same one to fi ve scale.
• A critical 2007 study of multi-process HRO buyers assessed
whether the benefits sought from outsourcing had been
achieved. On a one to five scale, with one being benefits not
at all achieved and five being benefits fully achieved, response
levels ranged from 2.48 to 3.00.
There are differing opinions on the success in outsourcing. The
topic has provenripe for criticism among axegrinders, and those
opinions aside, most business people view outsourcing as one
of many tools available to improve performance and reduce
costs, but only if it is pursued under the right circumstances and
executed efficiently and effectively. This requires building an
effective outsourcing governance organization and designing a
relationship that delivers sustainable value. IT executives must
continually and proactively validate their outsourcing decisions.
These outsourcing buyers must evaluate their own situations,
and this report is designed for those looking for the market
perspective in broader outsourcing market trends and
lessons learned.
In many cases with EquaTerra clients, the business case and
organizational strategy will drive clients to conclude outsourcing
functions are critical to success. Outsourcing remains a strategic
tool among many of our clients. Yet, the internal requirements,
technology and provider community provide a constantly
changing environment that often requires modifying an
outsourcing arrangement to properly adjust for these
moving parts.
It is also just not EquaTerra research that finds that buyers are
generally achieving the benefits sought from outsourcing. A
market study of 226 commercial firm executives by PwC released
in May 2007 found executives “bullish” on IT outsourcing. In
this study, 87 percent of respondents indicated ITO delivered on
the business benefits originally sought. Ninety-one percent of
respondents planned to outsource again and felt ITO had become
““an essential business practice.” The fi ndings do not imply ITO is
easy to undertake or always the right solution for an IT problem
but certainly it indicates that ITO has become a common and
often benefi cial tool for CIOs and their organizations to employ.
The last three EquaTerra studies referenced above, however,
highlight that outsourcing satisfaction levels can improve,
especially in HRO. That said, the levels are still positive and
above average. It is also important to note that multi-process
outsourcing, as addressed in these surveys, is still a relatively
immature industry. In HRO, for example, EquaTerra estimates
that there have globally only been 75-100 HRO deals involving
fi ve or more of the 22 HR processes. This is a small percentage
of the potential buyers for HRO. In many respects these early
adopters and their service providers are still learning what
its takes to undertake outsourcing of this scale and scope
successfully and hence are experiencing lower satisfaction levels.
Many of these larger and more complex deals have also
occurred relatively recently. This is important because
satisfaction levels in the early stages of deals, for example, is
lower during the typical 12 to 24 month transition period than
it would be in the steady-state or later in the deal (see Figure 1
from the EquaTerra 2006 market study, sample size 310). This
is because transition is inevitably painful and buyers also often
have unrealistic expectations about immediate outsourcing
improvements. Buyers also often initially under-invest in
outsourcing governance. Later into engagements buyers
typically increase their governance investment which drives
performance improvement often because buyers have a better
understanding of what it takes to make outsourcing work well.
While the ITO market by most measures is more mature
than other types of outsourcing addressed in these research
efforts, ITO buyers and services providers are in a dynamic and
rapidly changing market that tests their abilities to continually
improve service quality. Hence, despite its maturity, the ITO
market does not have markedly higher satisfaction levels. ITO
has experienced the most “mega-deals” that are inherently
challenging to deliver successfully. ITO is the most globalized
general and administration outsourcing category and the
service provider market is the most dynamic. ITO efforts also
have to deal with a very rapidly changing IT hardware and
software environment (e.g., the Internet, “e-business,” ERP, Y2K,
open source and other IT life events of the past 10 years). The
terms of most ITO deals, for example, are longer than the
lifecycle of the underlying technology.
Another means to test outsourcing satisfaction is to determine
the future investment plans for current outsourcing users.
Here EquaTerra also fi nds the message positive on outsourcing
performance and bullish on its future. Across multiple market
studies, EquaTerra assessed future ITO and BPO investment

Approximately one third of buyers
surveyed planned to maintain their current levels of outsourcing.
Approximately 25 percent in each study planned to expand
outsourcing’s usage either in the same functional area currently
outsourced or in new functional areas or in new geographies,
divisions or business units. Less than two percent of respondents
indicated that their organizations planned to curtail or eliminate
their outsourcing efforts. Note that respondents in these studies
could select more than one response, which is why totals exceed
100 percent.
In aggregate, therefore, current outsourcing buyers are much
more likely to expand their outsourcing efforts rather than
maintain current levels and rarely were they planning to fully
bring work back in-house. This investment trend would seem to
clearly indicate most buyers are satisfi ed with the return on their
outsourcing investments.
The “curtail” or “eliminate” outsourcing response levels are much
lower than the third party research cited in Figure 1. Setting
aside potential issues with research quality on either side, there
are some other potential causes for the extreme variations.
One is that EquaTerra’s market research studies focus on larger
buyer organizations. As noted, respondents are typically from
organizations with more than $100M in revenue and typically are
from fi rms with $10B or more in revenue. Larger organizations
with larger outsourcing investments are typically more
experienced and more committed to their efforts. Similarly,
EquaTerra research studies focus on deals with greater scope in
terms of multi-process or multi-functional efforts often involving
multiple geographies and business units. While efforts of this
scale are more complex, they are also potentially more rewarding
and buyers are more dedicated to driving their success.
What matters most is that buyers ensure that they understand
the demographics of any market research effort when
determining how applicable it is to compare to their own
situation and effort. If a F100 outsourcing buyer is undertaking
a global, multi-process HRO deal it is of little value to know that,
for example, small cap buyers of modest offshore application
development efforts often terminate their projects before the
original completion date. Just as outsourcing success requires a
business plan tailored to buyers’ individual needs and situations,
so too must comparative efforts to understand market trends
and best practices. It is for this same reason that EquaTerra
often takes issue with classic outsourcing performance
benchmarking efforts; too often they are not comparing
like situations or make extrapolations based on underlying,
inaccurate or incomplete data. We will address issues with
performance benchmarking in a future EquaTerra Perspective.
In contrast, several recent research studies do not present
outsourcing as a viable approach (see Figure 3, next page). In
an attempt to help current and prospective outsourcing buyers
better understand the reality of current outsourcing market
trends, this Perspective aggregates EquaTerra market research
on ITO and BPO buyer satisfaction levels and future investment
plans. These fi ndings reinforce the EquaTerra position that,
despite its problems, outsourcing has been proven as a viable
business tool for enabling process improvement and cost
reduction.
How are Outsourcing Buyers Responding?
It is clear from the EquaTerra market research that most
outsourcing buyers are continuing to invest in and expand
their outsourcing efforts. Buyers also are becoming more
sophisticated in their efforts. This sophistication manifests itself
in several ways:
• Buyers are more likely to pursue multi-sourcing efforts
and spread work across multiple service providers and
engagements. In some cases, often in HRO, this is a result
of not being able to find a single service provider with
the capacity and desire to take on a “mega-deal.” More
often, though, it is recognition of the potential benefits
of multi-sourcing. These benefits are derived from using
specialist service providers for certain functions and
processes, deploying incrementally smaller but more
manageable deals, diversifying risk, and taking advantage
of a burgeoning market of qualified service providers. It
is important for buyers to recognize and weigh, however,
the increased cost and complexity of multi-sourcing both
in the sourcing process as well as ongoing outsourcing
governance.

How are Outsourcing Service Providers
Responding?
Leading ITO and BPO service providers today are reacting to the
outsourcing learnings that have occurred in the market over
the past several years. They are improving their deal pursuit
processes to better ensure they are not chasing after potentially
bad or unprofitable deals or clients. Executive management
at most firms have better insight into and involvement in
the pursuit of major deals. Leading providers are also better
managing their pursuit costs and focusing on the most
appealing opportunities.
The ITO market has been reinvented by the extensive use of
remote, lower cost resources. India-based service providers
have excelled through this model but multinational ITO
providers are rapidly expanding their own lower cost market
footprint. Both groups are expanding rapidly to emerging
service delivery locations like the Philippines, Central and South
America, Eastern and Central Europe, Russia, and China. While
the initial focus was on lower delivery costs via labor arbitrage,
the emphasis now is on exploiting the use of highly skilled
resources and creating truly global service delivery models.
Global ITO also had moved beyond application development
and maintenance to support commercial packaged application
services and most recently infrastructure and operations
services. So while the ITO service provider market is most
mature in the general and administration space, it is still very
dynamic and rapidly changing.

Major BPO service providers, particularly in the HRO space, are
still often struggling with capacity issues. This is in part of a
function of operating in a maturing market and highlights
the complex nature of deals that are being constructed. All
BPO service providers need to better sell and deliver more
standardized service offerings, emphasizing the value of
successfully delivering a service over the appeal of a more
complex and unique service that may prove more difficult to
successfully deliver profitably.
While multinational service providers’ continued expansion into
lower cost markets will help their margins, it also gives them
access to additional talent to address capacity constraint issues.
Western expansion by India-based service providers is helping to
support their efforts to move from the ITO space into the BPO
space, an effort most are succeeding at though still on a small
scale. Multinationals, however, need to continue to work to
improve their remote delivery capabilities while providers from
lower cost markets must continue to successfully manage rapid
growth levels and continue to build out their specifi c business
process and vertical industry capabilities.
The Advisor Perspective – Critical Points to
Consider
Buyers of outsourcing services need to determine if, when and
where BPO and ITO are suitable business tools to deploy in
their organizations and understand how these relationships are
likely to change over time. Keen focus is not only required on
building the outsourcing business case but also on ensuring the
skills, resources and commitment exists to successfully execute
on and then manage and govern the outsourcing effort.
Critical to outsourcing success for buyers is to understand
what has and has not worked for their peers. While every
outsourcing effort is unique, buyers can learn much from the
experiences of their predecessors. This is why it is important for
buyers to track and monitor success levels for outsourcing in
the market as well as monitor the nature of future investment
plans. Buyers must use caution, however, and ensure that
any market assessments they are reviewing are accurate and
applicable to their own circumstances.
Recognizing that while outsourcing satisfaction levels are
positive and the market continues to grow, buyers should still
identify typical problem areas in outsourcing and proactively
address them. Here are some common pitfalls that buyers
should strive to avoid:
• Outsourcing decision criteria and their relative importance
are poorly defi ned: If outsourcing goals are not clearly
defi ned, it is diffi cult to determine if they are ever met.
• Shortcuts are taken to expedite the deal: Buyers must take
the time and seek the advice and expertise needed to
build a business plan and identify and negotiate with the
appropriate service provider as well as plan for the transition
and governance work. Rushing the outsourcing courtship
can lead to a troubled marriage.
• The choice of the commercial model is disconnected from
change drivers: Contractual obligations, service levels
and pricing should drive the service provider towards the
desired outsourcing goals. For example, maximizing cost
reductions typically does not mix well with improving
service levels.
• The governance and retained organizations are poorly
designed and implemented: Buyers must begin to plan
early for the outsourcing transition and subsequent
governance efforts. Adequately staffi ng the retained and
governance organizations and deploying solid policies,
processes and procedures are critical to outsourcing
success.
• Unrealistic or poorly communicated expectations about
what changes will occur when outsourcing occurs: Buyers
must focus on change management and better manage
both user and executives’ expectations. Things are typically
worse, not better, during the early stages of an outsourcing
effort and buyers must prepare for this likelihood.
• The focus is on fi rst and second years’ savings rather than on
balancing short- and long-term benefi ts: While quick hits
are important, buyers must view the outsourcing process as
a journey and not as an event.
• Buyer and service providers are unable to manage change:
Because outsourcing is a journey, many unexpected events
will occur. Processes, trust, open communications, and
executive-level involvement and support on both sides are
critical to managing this change

No comments:

Post a Comment