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This year the IT services industry saw a mixed bag of merger and acquisition activity (and regret), a more globally dispersed marketplace, increased focus on business outcomes, and–of course–more cloud build-up (and disappointment) than you could shake a stick at.
IT Outsourcing Trends to Watch in 2013
CIO.com asked outsourcing observers to take out their crystal balls and look to the year ahead. And if they’re right, 2013 could be a year of real growth for the industry–not as it relates to deal size or profit margins, but maturation on the part of both customers and providers.
1. Governance (Finally) Grows Up
Service providers, you’re on notice. “Companies will have little patience for teams filled with contract negotiators and [service level agreement] number crunchers that have strangled their organizations of value,” says Tony Filippone, executive vice president of research for outsourcing analyst firm HfS Research. “Expect to see governance upheavals as business-oriented leaders take the helm and meaty value-driven discussions with service providers dominate.”
In addition, outsourcing buyers will seek better incident, problem, and change management. “Customers will require their suppliers to either integrate with or adopt cloud-based service management systems, such as ServiceNow, in order to have a common platform and single source of truth for service management activities,” says Aaron Oser, a partner in the global sourcing practice at law firm Pillsbury.
2. Domestic Presence Becomes the Differentiator
Ten years ago, every outsourcing provider had to have a base in Bangalore. In 2013, they may have to set up shop in Birmingham or Boise to satisfy American outsourcing customers. “U.S. development centers will enable companies to source work at competitive rates and yet still maintain a certain level of control, high quality, and communication,” says Scott Staples, co-founder of IT service provider Mindtree.
Ditto for those outsourcing customers with operations in Latin America and Europe. Local support will be key. “Sure, low cost locations will remain important, especially to European companies in desperate need of recessionary salvation,” says Filippone of HfS Research. “However, the ‘new global’ really means demonstrating the capability for operations to seamlessly flow across centers around the world.”
3. Do-It-Yourself Outsourcing Increases
“More and more customers have in-house outsourcing experience,” says Shawn Helms, partner in the outsourcing and technology transactions practice of law firm K&L Gates. “Most major organizations have done many large outsourcing transactions.”
Back then, they brought in armies of consultants and lawyers. Not in 2013. “More and more organizations will try to go it alone and perform major outsourcing transactions without the assistance of external consultants or lawyers,” says Helms.
4. Flexible Pricing Matures
This year Jason Krieser worked on multiple deals with customers negotiating for-and getting-90-day payment terms. And that will become more common in 2013. “Customers are pushing very hard for this as a tight economy has customers managing cash flow at every opportunity,” says Krieser, partner with the law firm K&L Gates.
Expect providers generally to give in more to demands of pricing flexibility for IT services in the new year, says Filippone. “Look for transaction-based pricing to evolve in order to support improved process automation, and healthy innovation pools to fuel early stage investments in automation and cloud-based technology.”
5. Third-Generation Deals Enter Uncharted Territory
As mature outsourcing deals come up for renewal, customers will face novel challenges. Those that are swapping providers may find the transition is as difficult as the initial outsourcing, says Helms of K&L Gates. And European companies will have to deal with acquired rights directive (which requires each member nation to provide protection for employees in the event that some part of the business in which the employee works is transferred to another entity) when considering a change in vendor. transfers from one service provider to another service provider.
“Most customers will resign with their incumbents given the operational risk and financial constraints associated with moving to a new supplier,” says Pillsbury’s Oser
6. The Service Integrator Model Is Tested
This year saw the cautious introduction of the service integrator model, in which one provider manages the rest. “Time will tell if they will work, despite the best advice in structuring,” says Krieser of K&L Gates. All eyes will be on the state of Texas, one of the first IT organizations to give it a go.
Still expect to see more such deals going forward. “The lure on the part of the customer to be able to further reduce headcount–some in the IT organization will no longer be needed-will likely continue to drive interest in this structure,” Krieser says. “Providers will continue to entertain this, despite the risks, because it puts them in the driver’s seat in managing the customers IT environment and in the catbird’s seat as existing contracts expire or new projects arise.”
7. Transition Troubles Lead to Disputes
“Customers and suppliers will continue to close deals without fleshing out transition and transformation details and plans,” says Pillsbury’s Oser. “Failed or delayed transitions and transformations will [become] number one area of disputes between customers and suppliers. “
8. Chindia–or Chimerica–Becomes a Reality
“At some point in the near future a large sourcing provider (Indian- or U.S.-based) is going to be purchased by a Chinese company,” says Mark Ruckman, outsourcing consultant with Sanda Partners. ” This purchase will create a huge shift in the economics of sourcing.”
9. Backsourcing Blossoms
Outsourcing pioneer GM made the biggest backsourcing splash this year, with its announcement that it would be bringing 10,000 jobs back in house in coming years. Other IT organizations will follow suit this year.
“Due to a variety of factors, chief among them the realization that some services are better entrusted to employees rather than ‘outsiders,’ dissatisfaction with vendor performance, and continued erosion of offshore/onshore rate arbitrage benefits, companies will repatriate currently outsourced infrastructure and in some cases, application development services, at a greater pace,” predicts Steve Martin, partner with outsourcing consultancy Pace Harmon.
Low-level and routine tasks will remain with third-parties while higher value positions like capacity planning, architecture, and configuration management will move back in.