‘CEE IT Outsourcing Review 2010′: Expert View

‘CEE IT Outsourcing Review 2010′: Expert View

During 2009, the global economy struggled with a major financial crisis. The second half of the year was marked by signs of stability, and many companies turned to outsourcing business practices in order to reduce their expenses. Thus, the IT outsourcing market received additional contracts. In some respects, the global recession became a good incentive for further developing the IT outsourcing and software development services market.

Several independent experts working in the outsourcing industry – such as Phil Fersht, Boris Kontsevoi, Magdalena Szarafin, Christoph Prieler and Franco Dal Molin — kindly responded to the questions presented below. They provided their views on these topics and other trends observed in the market of IT outsourcing service providers.


Phil Fersht, Chief Executive Officer, HfS Research

Phil Fersht is Founder and Chief Executive Officer of HfS Research the leading boutique research analyst organization covering global sourcing strategies.  Launched in 2007, its famous blog “Horses for Sources” has more than 100,000 regular visitors across the global outsourcing industry, and is widely-recognized as the leading destination for collective opinion, research, analysis and coverage of industry developments.  Its mission is to bring together the new world of social media with traditional research and analysis, to redefine the way in which advice, insight and knowledge is shared.

Phil is an acclaimed industry analyst, practitioner, advisor and strategist across Business Process Outsourcing and IT services worldwide, having worked extensively in Europe, North America and Asia. During this time, he has advised on more than 100 major outsourcing and offshoring engagements and consults regularly with senior operations and IT executives on their global sourcing strategies.

During his career, Phil has worked at AMR Research (Gartner Inc), leading the firm’s BPO and ITO practice.  Previously, he served as market leader for Deloitte Consulting’s BPO Advisory Services, where he led numerous outsourcing and offshoring advisory engagements with Fortune 500 enterprises.  He also worked for outsourcing advisor Everest Group leading the company’s BPO research practice.  Phil began his career at IDC across its European and Asia/Pacific operations.

Phil is a frequent author and speaker on IT services, Finance, HR and Procurement Business Process Outsourcing trends and issues. He was named both an “FAO” and “HRO Superstar” by FAOToday and HROToday Magazines for 2005, 2006, 2007, 2008, 2009 and 2010 and was featured as the cover story for the December 2006 issue of FAOToday as one of the outsourcing industry’s most prominent advisors. He was also nominated for “Advisor of the Year” at the FAOSummit 2008. He speaks regularly at industry conferences, which have included The Conference Board, NASSCOM, IDC Directions, IQPC’s Finance Transformation, the Sourcing Interests Group and the Council of Supply Chain Management Professionals. He is also a regular columnist for several industry publications and a frequent industry commentator for CIO Magazine on IT Outsourcing issues.

Phil received a Bachelor of Science, with Honors in European Business & Technology from Coventry University, United Kingdom and a Diplome Universitaire de Technologie in Business & Technology from the University of Grenoble, France.



About Horses for Sources

Horses for Sources (HfS) is the foremost advisory analyst firm and networking community, focused on helping enterprises make complex decisions with their global outsourcing strategies.

HfS provides the most impactful and frequently-visited collaborative community platform in the global services industry, providing rapid and insightful commentary, analysis and debate of enterprise outsourcing dynamics. The organization is unique in the fact that it integrates personable social networking with market research and advisory services.

HfS’ mission provide a unique environment for collective research, opinion, experience and knowledge across the global outsourcing industry to help enterprises explore new performance thresholds. Led by industry expert Phil Fersht, the HfS team is a multi-disciplinary group of analysts across North America, Europe and Asia/Pacific regions,  with deep domain knowledge in Business Process Outsourcing, Information Technology Services and Cloud Computing.

Launched in 2007, the HfS blog has more than 100,000 monthly visitors across the global outsourcing industry, and is widely recognized as the leading destination for collective insight, research and open debate of industry issues and developments. The HfS LinkedIn community is thriving with over 10,000 industry professionals sharing views and information daily.  More information about Horses for Sources can be accessed at www.horsesforsources.com.  The company can be followed on Twitter at www.twitter.com/horses4sources and LinkedIn by joining “The BPO and Offshoring Best Practices Forum group.”

 Boris Kontsevoi, COP President and CEO, Intetics Co.

Mr. Kontsevoi is a Founder and President of Intetics Co. Under his leadership a group of software engineers developed into a truly global sourcing company with multiple professional certifications and industry awards, including Top 100 Outsourcing and Top 100 Global Services company. For the impressive growth Intetics had demonstrated over the years, Boris received an Entrepreneurial Excellence Award from The Business Ledger in 2009. Boris has over 20 years of managing experience and about 40 scientific publications. He was a featured speaker at several international conferences. He holds a Master’s degree in Radiophysics and Computer Science from the Belarusian University and certificates in project management from Aspen (ISIM) University, Colorado, USA. He is Certified Outsourcing Professional (COP), a professional designation awarded by International Association of Outsourcing Professionals (IAOP) to leading outsourcing practitioners that demonstrated ability to design, implement and manage successful outsourcing initiatives. Boris also serves on IAOP’s Eastern European Advisory Board and, during last 7 years, as a Distinguished Judge of WebAward Competition conducted by Web Marketing Association. He is also a member of IAOP, the Outsourcing Institute, Technology Executive Club of Chicago and several other professional, commerce and community organizations.

Magdalena Szarafin, International Management Accountant, Analyst, Publisher, Speaker

Magdalena Szarafin holds a Master’s degree in Economics (M.A.), Master of European Studies (M.E.S.) and Certificate in International Accounting (CINA). She has immense knowledge of the outsourcing sector and is one of the experts in shared services and outsourcing industry analysis. Her research interests include insourcing and outsourcing in connection with the value chain. She is the author of many publications dealing with outsourcing, knowledge management and total quality management (TQM).

Magdalena lives in Frankfurt, Germany and works as an International Management Accountant in a big multinational pharmaceutical group. In her leisure time she is active in many non-profit organizations (she is the Chairman of IFRS Practice Committee at German CPA Society, member of European Management Accountants Association, Social Networking Manager at Indo-German Software Competence Network (Indescon) e.V.). Except of that she is a speaker on conferences and other events. She prepares her PhD dissertation focused on shared services.

Website: http://www.szarafin.info

Blog: http://szarafin.wordpress.com

Profile on Xing: https://www.xing.com/profile/Magdalena_Szarafin

Christoph Prieler: Offshoring Executive, Management Consultant, University lecturer and Entrepreneur

Christoph is a true aficionado of the outsourcing and offshoring industry with more than 10 years of experience in executive positions covering different industries and geographies. He served as one of the pioneers in the CEE nearshoring industry when helping build up the SSC for IBM Hungary in the year 2000. Subsequently Christoph moved to Flextronics, where he signed responsible for creating and implementing the company’s global SSC strategy comprising centers in Mexico, Hungary, India and China. He lived for 3 years in India, where he built up Flextronics’ global SSC organization from scratch to more than 1,000 employees handling back-office functions in a 24×7 environment. Equipped with leading edge experience and methodology for successful offshoring programs, Christoph moved to McKinsey & Company, advising multinational service providers and buyers in Europe on their O&O strategies. In his role as a management consultant he severed as well a North African government to define and execute their strategy to become a preeminent offshoring location, helping to create several thousands of jobs for the industry. He is currently preparing the launch of his own service provider. Christoph Prieler is a well-received, challenging speaker at international conferences on Outsourcing and Offshoring and gives regular university lectures on the topic

Franco Dal Molin, Country Manager Switzerland at Ciklum

Franco has 20 years of experience in the software industry, business development and IT management positions. Since 2009 he represents Ciklum, a leading Ukrainian outsourcing company, in Switzerland. Prior to his role in Ciklum, he was founder and CTO of Collanos Software AG in 2003, a Swiss startup creating a team collaboration solution. From 1999 to 2002 he worked as consultant and independent contractor for e-Business start-ups and software companies. Previously, Franco founded a software engineering company in 1994 and sold it to GFT Technologies AG four years later. Franco has a B.S. in Computer Science from the University of Applied Sciences Aarau and an Executive MBA in Business Engineering from the University of St. Gallen, both in Switzerland.

About Ciklum

Ciklum is a Danish innovative IT outsourcing company specializing in nearshore software development in Ukraine. We do not follow the traditional IT outsourcing model of project-based services, and instead we offer our clients to establish your own dedicated IT department in Ukraine or to outsource, completely or partially, your software development. This is equivalent to having your in-house IT specialists but for a significantly lower cost and less administrative nuisances.

Question 1. What are the main development trends on IT outsourcing services market and what will be the main outsourcing drivers for the years to come?

Phil Fersht: IT outsourcing is reaching a pivotal juncture in its maturity.  Many of the large enterprises today have now moved much of the “low hanging fruit”  application development and maintenance work to service providers and are now need looking at new ways of finding further savings beyond utilizing low-cost labor services.  They are still driven by cost and efficiency, but also by innovation – i.e. unique and creative methods to find new levels of productivity and top-line growth.

At HfS Research we see four trends of ITO that are developing

  1. Companies moving from staff augmentation models to broader managed services engagements.  This entails moving to longer term contracts with suppliers, often consolidating with larger providers who can offer pricing that is tied to volume, in addition to simply the number of staff provisioned.
  2. Companies sourcing more complex tasks / functions to providers.  As companies get more used to outsourcing work offshore, providers are beginning to take on more complex activities, such as infrastructure services and business alignment / architectural IT work.
    Companies investigated Cloud Computing, SaaS and Web 2.0 technologies.  This is increasingly viewed as the net wave of Capex reduction for firms, and being able to drive out cost via arbitrage of hardware infrastructures, infrastructure personnel and rationalization / eradication of expensive “lock in” software licenses
  3. Companies outsourcing business processes with their IT. Many companies are looking at dovetailing business process outsourcing (BPO) with their IT investments to help fund new technology investments and drive out further cost.  They are also taking advantage of the synergies a single provider can bring to the table when delivering personnel to process business transactions, in addition to manage the software workflow (for example, insurance claims processing).

Boris Kontsevoi, COP: The current market sends uncertain signals. It was a significant drop in demand in 2009. According to TPI, in the 2nd quarter of 2010 the ITO market in its large (over 25 mil) segment was down 23% on year to year basis. Right now there are some signs of recovery but they are very soft and uncertain, with some research organizations even reporting that overall outsourcing market still grows. However, without broad economic recovery in the USA and EU we’ll most probably see rather flat year in the industry. The cost savings will remain the main driver of outsourcing, and, specifically, East European providers will feel a strong pressure from Indian competition in this regard. However, we can expect that Eastern Europe will continue receiving its traditional share of demand for high-end software engineering and other IT services.

Magdalena Szarafin: Let’s perceive the IT market from the perspective of the trends affecting its main players (vendors and buyers). The following trends can be observed on vendors’ side:

    • Searching for new products and solutions to increase sales revenues,
    • All big suppliers (and many smaller ones as well) deal with new service models (e.g. cloud computing, managed services, SaaS),
    • Integration of IT and telecommunications solutions,
  • Using service models based on economies of scale: having a large number of customers, low sales revenue per customer and low costs of sales per customer.

And the trends observed on buyers’ end can be summarized as follows:

    • Cost pressure and limited budgets for IT investments,
    • Security concerns,
    • Need for flexible solutions,
  • Multi-site collaboration, need for product and services supporting home office and mobility solutions.

Christoph Prieler: The current buzz in IT outsourcing is certainly about cloud computing. Gartner anticipates, that the global services market for cloud computing will reach an approximate revenue of USD 150 bn within the next four years. Consequently IT service providers are busily upgrading their service offerings to match the cloud needs of their existing customer base and to enable the access to an entirely new customer segment, the SME market.

Furthermore the rise of smart phones and 4G technology will open up new business areas for these service providers, who have the expertise with the technologies and will be able to handle profitably millions of transactions at very low revenues per transaction.

According to NASSCOM the main drivers of future outsourcing revenues will derive from four customer segments:

    1. Existing customers, upgrading and enriching their outsourcing relationships with knowledge based and innovation lead services;
    1. New industries segments, specifically healthcare and the public sector;
    1. Small and medium enterprises as an new customer segment; and
  1. Domestic outsourcing in developing (BRIC and CIVETS) nations.

These four sources are expected to drive the shift from ITO to BPO as the largest contributor of outsourcing revenues in the upcoming years.

Franco Dal Molin: The traditional project-oriented working model has become a global commodity service. Clients expect more from vendors. They seek reliable partners helping them to solve business problems creatively. The trends in IT outsourcing go towards specialization and value-adding service offerings.

For instance, small providers are increasingly positioning themselves in lucrative niches, where they can focus and maintain a technical lead position. Examples include mobile development, gaming engines, social media apps, and even augmented reality or 3D animations. Medium and large providers are competing with innovative business models. Examples include dedicated client teams, flexible mixed-mode engagement models, idea creation & fast prototyping, shared risks/reward models, etc.

The main drivers in the future will be innovation and time to market. Clients need to be nimble and outperform their competitors with smarter solutions – faster. As a consequence, outsourcing providers must “plug-in” into their client’s needs and expectations and become equally nimble. Proposals must not be simply cheaper, but rather more creative!

Question 2. Has the recession and the following cost-pressures changed the companies’ attitude to outsourcing   (IT outsourcing specifically)?

Phil Fersht: Yes – firstly, it’s become a “normal” every expected part of a CIO’s provisioning model for IT.  The old arguments against outsourcing are fading heavily into the past.

Secondly, companies are not just looking to rip out cost – they are looking at ITO to improve the business processes and their global operations.  Several top CIOs now look at their IT department with the attitude “we need some smart IT innovators inhouse to drive the technology innovation into the business lines, and we need competent service partners who can take on the less procedural and operational IT support work cost-efficiently”

Thirdly, with the recession recovery better-than-expected, most firms are demonstrating more patience with their outsourcing decisions and are taking more time to get this right.

Boris Kontsevoi, COP: Usually outsourcing benefits from recessions. I would even say that recessions of the 80th were the supreme cause of outsourcing. This recession, it seems, is a bit different. Most probably the current drop in the market volume is a consequence of the fact that outsourcing for the last 30 years has become a mature industry and an integral part of the World economy. However, we may see yet a sharp increase in demand in the second half of 2011 or 2012 as several research surveys show that there is a significant deferred demand for outsourcing services and a lot of in-progress feasibility studies, especially in the mid-market.

Magdalena Szarafin: For many vendors the crisis time has brought the opportunity to increase revenues as many companies think about outsourcing their operations to third parties in difficult times. Also those of them who were skeptical about outsourcing until now. The decision whether to outsource (or not) tends also to be met quicker and easier under the pressure of crisis. Companies try to focus on their core competencies and to cut costs. Therefore IT outsourcing has been as popular in the crisis time – trying to improve their cost structure, companies tend to implement projects which help them to improve performance and have short time of amortization. Also outsourcing infrastructure to third party enables the buyer to improve short-term liquidity.

What is going to come after the crisis? Vendors can be optimistic, after the phase of cost-driven, quantitative outsourcing the phase of qualitative outsourcing is likely to come. Companies searching for innovations, quality improvement and use of external know-how will try to outsource their operations, expecting vendors to help them to achieve these objectives.

Christoph Prieler: The “new normal” is characterized by a high volatility and uncertainty in the business environment. While in the past outsourcing deals were first and foremost signed for cost savings and operational improvements, experienced outsourcing buyers are increasingly looking at service providers as true business partners, who help navigating through the new business circumstances.

In addition, the economic pressures of the downturn have accelerated the acceptance of outsourcing as a lever for performance improvements among new customer segments such as small and medium enterprises.

Franco Dal Molin: Yes, it has. Many companies are now seriously evaluating outsourcing for the first time, or at least they do consider the possibility with a genuine interest and open mindset, whereas in the past we encountered more skepticism, widespread black-and-white thinking and cynicism.

Obviously most companies are looking at outsourcing primarily as a means for saving costs. In a number of West European economies there is – despite the crisis – still a significant shortage of skilled IT specialists. Finding developers and hiring them fast enough becomes often more crucial than just lowering costs. Finally, in times of uncertainty and volatility, outsourcing is looked at as an ideal way to become more flexible and/or scalable.

Question 3. View of the CEE region as a cluster of IT outsourcing services providers. Advantages, disadvantages, trends, image, specifics.

Phil Fersht: Advantages:  strong understanding of local regulations / compliance and security issues.  Good language support capability.

Disadvantages:  Too small to scale and delivery cost savings.  Potential to get acquired is high.

Boris Kontsevoi, COP: Eastern Europe in comparison with other outsourcing destinations has certain Pros and Cons. Advantages include historically strong engineering tradition and technical training, geographic proximity and relatively low turnover. Also, and this is very important, the business culture is much closer to those of America and Europe. And all of this for cost comparable, yet slightly higher, to other regions.  The main difference, though, is that Europeans will try to tell the client how to do things better and may even argue with the client on technical solutions, for the best client benefit, of course!

However, there is a strong perception, especially in the USA, that outsourcing is an “Indian business”.  In many cases business executives simply don’t take Eastern Europe into consideration at all. I believe that various East European industry and business associations must play a greater role in promotion of the region as outsourcing destination. Unfortunately, there is nothing similar to NASSCOM yet. Government participation in such promotion would be a tremendous help as well. Additionally, I believe that Eastern Europe, unlike Central, is heavily underutilized for BPO. There is a great pool of well-educated resources available (e.g., 87% of Ukrainian high school graduates attend some college!), with good language capabilities that could be used for various BPO services. We’ll see the boost of BPO in Eastern Europe yet.

The biggest disadvantage of East European outsourcing providers is lack of understanding of Western business drives and strategies. Right now clients demand from their providers a high level of proactivity in development of the client’s business (up to “make money for me!”) and a lot of innovation. In Eastern Europe it’s possible to get a technical design of any complexity but not a proposition on business strategy. It’s valid for other outsourcing regions too, but Indian and some Chinese outsourcing companies sit on a pile of cash, and have started to acquire necessary business expertise by purchasing local companies in delivery destinations.

Another interesting trend is increasing significance of nearshoring. As new stratums of businesses, especially mid-size businesses, are coming to outsourcing market, they feel more comfortable to work with nearshore providers. Additionally, similar time zones and physical proximity promote more efficient operations. A noteworthy and interesting side effect of this is acquisition of Latin American and East European providers by Indian companies. Welcome to the Global World!

Further talking about M&A, I put a lot of thought trying to understand why market consolidation is so weak in Eastern Europe. By headcount, the #1 provider in Eastern Europe is less than 4% of that in India! My answer lays in the culture. Western countries have individualistic culture where people, including business leaders, can work together, collectively. Asia has “collective culture where people work collectively”.  (On my recent trip to China, a tour guide in some wonderful Chinese garden mentioned that two heritors of the Garden founder still live in a pavilion in that Garden and …they must be scared all the time. I asked why. My question came as a big surprise to the guide but her answer shocked me, “It’s so obvious! When it’s less than five people, it’s always scary.” Ah?!)  And Eastern Europe, namely Russia, Ukraine and Belarus, has “collective culture where people, especially business leaders, can’t work collectively”.  Surprisingly, this culture exactly has a consequence that you can get a technical excellence but not a strategic business advice as discussed above.

Magdalena Szarafin: One friend of mine, who comes from Canada, visited Poland a few years ago. Then he said to me: you know what? I am very impressed by what I saw. That is a very modern country. I visited some companies: everywhere young, dynamic, high-motivated people speaking foreign languages.

In my opinion, that statement describes the CEE region very well. Another maxim which points out the situation very well is: “Outsourcing is people’s business” – the geographical, cultural and language proximity are of importance for buyers. Customers from Western Europe are likely to make business with partners from Central and Eastern Europe as their locations are available within 2-3 hours their business partners speak their languages. They are high-qualified and the prices are still lower than those in Western Europe.

And another maxim yet: “We are the second (third, fourth) – we try harder” implies that a customer doing business with partners from CEE countries can expect to be delivered with high-quality services.

One of the challenges is cost explosion: wages and salaries in the CEE countries are rising quicker than those in Western Europe. Also lack of professionals which can already now be observed in many industries is the next challenge for the upcoming years.

Christoph Prieler: The CEE region comprises “natural” advantages to form a preeminent cluster for regional outsourcing services. These include the cost advantage of a highly skilled labor pool with continental European language skills, the geographic and cultural proximity with buyers’ locations and a stable as well as advanced legal and infrastructure framework compared to competing locations.

However the fragmentation into different countries each pursuing its own interests, the lack of political support for the development of the industry and the perceived missing long term industry strategy specifically noted in the area of talent development can endanger the competitive advantages.

Furthermore competing destinations have been proactively supporting and promoting the industry. They have provided the environment for the creation of multiple renowned industry brands (Infosys, TCS, Raya, et.al.), who have continuously fueled industry growth and reputation in the respective locations, while only a handful of local CEE champions have emerged. The decline of the region is manifested in the AT Kearney location index 2009, in which for the first time no CEE country is ranked among the top ten outsourcing destinations.

The near future will determine, if the region will convert into a self-confident destination of choice for a broad range of services or loose the race for employment in the outsourcing industry against the emerging powerhouses in North Africa or the ever-competing destinations India and Philippines and remain a cocoon for the Western European captive industry.

Franco Dal Molin: Clusters are defined as “groups of the same or similar elements gathered closely together”. Sure, we can think of clusters of outsourcing companies in certain cities, like Kiev or Minsk, but not CEE overall. Rather than just claiming to be an IT cluster, the various CEE economies should promote and actively support complete “ecosystems”. An outsourcing ecosystem should consist of IT companies, universities, business parks, entrepreneurs, venture capital, developers’ communities, training programs, a favorable tax system etc. Only if all ingredients are in place, a region can establish itself as a solid pan-European outsourcing hot spot.

Governments better support this industry! Initiatives like Hi-Tech Park and “IT-Nation” in Belarus, where the government envisions to create 300’000 software professionals by 2015, are smart macro-economic moves and long-term investments that will pay back.

Question 4. Europe outran US as the biggest outsourcing spender last year (http://bit.ly/5PQcFA),  will this trend remain?

Phil Fersht: Yes – it has a lot of catching up to do with ITO.  Also, several larger service providers need to develop more competencies and scale for delivering to CEE countries, in order to drive the cost of ITO down in Europe.  This is all happening.

Boris Kontsevoi, COP: I’ve seen this TPI report. It’s interesting; however, the definition of Europe as “G2000 companies headquartered in Europe” is not completely correct as G2000 companies are GLOBAL by their nature. If our company has an American client that has headquarters in Europe, is it European or American outsourcing? We count it as American, but TPI sees it as European? Additionally, there is a report from the same TPI with Total Contract Values (TCV) of large outsourcing deals for the first half of 2010, with TCV of 20 billion for Americas and 16.6 billion for EMEA. Also, I think that spending numbers for Q3 09 cited by TPI can reflect the fact that the recent recession has started in the USA and then hit Europe. Respectively, the recovery has begun in the USA in the same Q3 09. Europe, as usual, is a half year behind America in the economic cycles. This time, additionally, we had the Greece story in Europe and now cannot be certain about recovery in Europe. So, outsourcing spending numbers are likely to reverse back to America again, as actually the mentioned TPI report for the first half of 2010 suggests. Generally, I would expect that the volume of outsourcing market is directly proportional to economy size. Since the size of USA and Canadian economies is just about 7% bigger than EU economy, the outsourcing spending of both regions, especially long-term, to smooth out saturation effects, should be about the same.

Magdalena Szarafin: Yes, I would definitely say yes. The improvement in macroeconomic conditions will actively contribute to this positive trend. According to Gartner, IT spending in Europe increase in 2010 by 5.2 percent comparing with the previous year while the average increase of IT spending in the US amounts to “just” 2.5 percent in 2010 comparing to 2009. And one thing cannot be forgotten: there is still a gap regarding IT and telecommunications between Europe and the US so that European companies have no solution than to spend more than the US to make up for the distance missing.

Christoph Prieler: The US economy has experienced the highest impact of the economic downturn around the globe. Consequently US companies were securing their short term survival rather than closing strategic outsourcing relationships in 2009 and many outsourcing deals in the pipeline were therefore put on hold. Since the economy has picked up, we experience outsourcing spent in the US on the rise , overtaking European revenues again. The interesting trend within the European outsourcing spent consists of the fact, that continental European countries such as France and Germany have for several quarters now overtaken the UK in spending amounts.

Franco Dal Molin: It is always difficult to predict the future, but does it really matter who is spending the money? More important is to understand where all the spending goes, i.e. growth rates, market share of the global outsourcing centers. For example, how many IT professionals work in all the CEE countries portrayed in this review, in total? And how many employees do the largest Indian IT outsourcing giants have? Don’t be surprised if the two figures come very close to each other. And how about the Chinese long-term plans to establish 10 giant IT regions?

Therefore, the important question is how much of the global spending can be brought to the CEE and into what services areas! The CEE must position itself attractively, in order to grab a nice piece of the global IT outsourcing cake. In terms of sheer size and price it is pointless trying to outcompete India or China. CEE has the unique opportunity to become the creative, innovative, fast-paced, business-friendly, culturally compatible IT hot-spot of Europe. This will only happen, if Governments actively support such visions.

Question 5. How growth of new technology trends (Cloud computing, virtualization, etc) impacts IT  outsourcing and business models?

Phil Fersht: At a tactical level, when you look solely at Cloud as a hardware-capacity solution, it’s hard to see beyond how it can impact businesses beyond creaking ITO-only deals.  However, you really need to look at the convergence of BPO, SaaS and Cloud in a broader outsourcing context to start to visualize how these three pillars of business delivery can – and are – coming together in a blended outsourcing model.  Yes, it will take time (and HfS Research has called out a two-year time frame to see some real progress here), but it has to happen eventually.

BPO provides labor arbitrage and the ability to personalize “standardized” solutions, SaaS provides the one-to-many process templates that underpin the BPO, and Cloud the delivery engine.  Moreover, the virtualization that Cloud provides also adds a whole new dimension of cost-arbitrage for clients – the arbitrage of inefficient hardware infrastructure, the ludicrous wastage of energy costs (not to mention the impact on the environment), and the labor costs to maintain and support infrastructure that provides zero competitive advantage for organizations.  The one anti-Cloud argument that keeps getting thrown out there is centered on data-security, but how this is really any different from those security issues surrounding the externalization of  data in today’s outsourcing engagements, is beyond me.

I completely agree that this “blowing up of the traditional outsourcing model” is far more easily said than done, and we are seeing a huge resistance to this movement from many IT professionals threatened by these trends, but the bigger picture doesn’t lie: company leaders are constantly seeking new avenues of cost-elimination and Cloud – combined in an outsourcing context – can provide that for many companies willing to embrace it.

One other factor to consider is the push we’re seeing from the vendor-side.  Yes, there’s tons of hype and fluff right now (that’s how the tech industry works), but the service providers, in particular, need to keep moving the needle to keep their margins high, and their clients’ productivity levels on a constant upswing.  This relentless pursuit of cost-elimination is driving our world today, and the speed at which service providers need to keep sourcing new ways to help their clients find new thresholds of business effectiveness has never been stronger.  Some providers will always remain content picking off low-end body-shopping work, but many are eyeing the bigger pie and will strive to make this outsourcing convergence a reality.

Boris Kontsevoi, COP: I don’t see any impact from technology innovations on outsourcing models, at all. Cloud computing, virtualization, etc. is exactly like a new version of .NET platform, or operating system, or any other technological advance. These are new tools, that will be utilized of course, but won’t directly impact the business models, except, perhaps, for IT infrastructure companies.  It’s more interesting to discuss a new trend of cloudsourcing, (or crowdsourcing, e.g. Wikipedia success, Tripadvisor and tons of other product review websites, Google maps, blogging, etc.), when the power of “a public cloud”, a crowd is utilized to create a new value. Of course, such public clouds will need cloud computing technologies to run (and some are already available from Microsoft, Google, Amazon, etc. and we should see a lot of new start ups yet) but there is not yet a good business case. I can understand the drive behind the people who write a Wikipedia article or a product review but doing anything like this for a commercial organization will immediately require some incentive and compensation. We’re yet to see in which form the new crowdsourcing models will appear.

One more interesting trend is a new reincarnation of rural sourcing. Offshoring still is more cost effective but with all populist political agendas regarding job outsourcing and, in some situations, availability of a good business case to use native speaking resources and culture, rural sourcing will increasingly compete with offshoring.

Magdalena Szarafin: It is expected that IT outsourcing will get much more heterogeneous than ever before. Security concerns buyers have tend to motivate vendors to offer new forms of business relations. Traditional outsourcing with personnel, assets and responsibility transfer is very likely to be amended by outtasking and utility sourcing where no personnel and assets transfer takes place and the buyer is responsible for processes.

Christoph Prieler: The emergence of cloud computing and social media technology in a globalized world has the power to severely disrupt existing business models of established services providers. While cost savings does not constitute a differentiator anymore, the next generation service solutions will need to constitute a combination of application, infrastructure and process knowledge, outcome-based (e.g.: consumption) pricing structures , leveraging global service delivery and cloud-enablement as well as offering activities, which are complex and difficult to automate.

New entrants might disrupt the market with “in-the box” solutions based on cloud platforms, which could then be offered at a fraction of the cost compared to today’s offerings. Innovative revenue models could allow service providers to offer certain activities even free of charge.

Franco Dal Molin: Every new technology trend is primarily a new opportunity. I don’t see special impacts on the outsourcing industry as such. Service providers should constantly monitor what is going on, familiarize themselves with the latest technologies, understand which concepts evolve globally, and embrace the right trends at the right moment.

This means regular shifts in skills and technologies. For example, only a few years ago it was important to create installers for packaged software, while today it is relevant to understand web services or geo-tagging for mobile platforms. This closes the loop and brings us back to the first question. Providers must continue to evolve, be creative, and deliver solid added-value to their clients.


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