Which industries will experience a surge in outsourcing in the next few years, and what risks will buyers of those services face? Are there business processes or functions that will begin turning to outsourcing in the next two to five years? What value opportunities and risks will they bring? In what geographic regions will companies begin adopting the outsourcing model? Outsourcing Center asked leading service providers for their predictions about these hot spots for growth in outsourcing. Here’s what they shared with us.

Nearshore, offshore, onshore, best shore

Although “nearshore” is a favorite model and buzz term bandied about in outsourcing news and advisories today, it will soon fall by the wayside. First of all, it’s a misnomer. “Nearshore” to Japan, for example, is China or Vietnam; but those two service delivery locations to U.S. and European businesses are “offshore.” Brazil is a nearshore provider but also a large onshore provider.

Genpact predicts nearshore service delivery centers will likely continue to grow, but not as significantly in dollars or percentages as the offshore centers. According to Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, we’ll likely see an increase in the use of onshore centers. “Federal, state, and local governments will drive this growth in terms of the attractiveness of incentives they create to stimulate domestic job growth.”

Deepak Patel, CEO, Aditya Birla Minacs, says the decision between nearshore, onshore, or offshore is “not so much about achieving scale but, rather, is about delivering the right value to companies by providing the ideal mix of the right delivery destination and the right knowledge set available. In the coming years, newer geographies will emerge, but smart outsourcers will choose the destination that brings the most value.”

John A. Haslinger, Vice President, Product Marketing at ADP, says, over time, he expects labor arbitrage advantages will remain but increasingly companies will balance them against the need for particular skill sets. In HR, for instance, “companies will balance labor arbitrage with the service provider’s ability to foster long-term relationships.”

Allied Digital Services’ President, Kevin Schatzle, believes nearshoring will increase over the next two years because outsourcing in general will increase. He predicts that in five years, as the industry matures, Canadian pricing will start to approach U.S. costs.

Gordon Coburn, Chief Financial & Operating Officer at Cognizant says globalization initiatives are evolving “from a point-to-point delivery model to a many-to-many model where the provider delivers from many locations in the world to a client’s locations in many other parts of the world.”

Rajan Kohli, CMO, Wipro Technologies, adds that “best shore is the way to go. That may mean a combination of nearshore and offshore, or it may mean just offshore. Buyers will need to make decisions based on cost, business value, and business availability.”

Ritesh Idnani, COO, Infosys BPO, says “the trend of nearshoring will continue to gather steam. But the global economic landscape has definitely mooted the call to a more protectionist outlook by countries, and that trend will continue in the short term. They will, however, have to bear the brunt of continuous monitoring to ensure they continue to be cost effective and build in efficiencies. The ‘offshore train’ left the station several years back; hence, offshore will continue to grow in volume and market share.”

Dina Kholkar, Head, BFSI, TCS BPO Services, predicts that the definitions of onshore, nearshore, and offshore will blur over the next couple of years because providers “will increasingly expand their base to build a global network delivery model to address the diverse demands. There will also be an increasing creation of Centers of Excellence by function,” she states.

The future shift from focusing on nearshore / offshore / onshore debates is nowhere more evident than at HP where there is now a “Best Shore Services” division. Even so, Jeff Womack, Vice President Global Enablement, HP Best Shore Services, says HP believes that nearshoring will “continue to have a seat at the global delivery table because companies – especially in the European Union region – will want the cultural affinities and languages as well as aspects of data privacy.”

Womack also points out that some nearshore locations are already maturing to the point that they no longer meet the requirements to qualify as a true nearshore location because costs begin to reach parity with major markets such as the United States, Western Europe, and Japan.

Yugal Joshi, Senior Analyst, Everest Group, says that, “with offshore suppliers seeing their tax exemptions going away, the cost-effectiveness of their large offshore centers will reduce significantly, which will prompt them to go nearshore.”

Don Schulman, General Manager, Global F&A and SCM, IBM, predicts nearshoring will grow in the short term because organizations will continue to perform high-level activities (such as budgeting and corporate tax) discretely and locally – regardless of whether shared services or outsourcers are doing the work.

“This is less about nearshoring and more about growth due to more complex work moving into a shared-services environment,” Schulman explains. “Success in outsourcing has led to this kind of work moving to a centralized environment. Organizations are beginning to look at their shared-services strategy as a hybrid model. It is not an either/or decision but, instead, a multi-dimensional approach that leverages both internal shared services and outsourcing.”

Industries increasing adoption of outsourcing

Nearly all of the service providers whom we tapped for insights anticipate that the U.S. healthcare industry will experience a dramatic increase in outsourcing over the next two to five years.

Pryor at Genpact says the significant cost pressure and large number of additional people that will need coverage will require that the industry adapt rapidly in leveraging technology, outsourcing, and reengineering to change business models and cost structures.

Most of the executives we interviewed also predict a large uptick in government outsourcing in the next few years. Schatzle at Allied Digital Services says government and education will migrate to outsourcing for IT support and “will receive great benefits of modern approaches.” He advises that buyers in these segments especially need to evaluate IT services from security and redundancy perspectives.

Kohli at Wipro predicts the next few years will see “BPO opportunities arising in retail, manufacturing and media, but in forms as not serviced before.” He says the driver for this growth is the convergence of the Software-as-a-Service (Saas), cloud, and ITO/BPO models “plus the ability of Tier-1 providers to do business function outsourcing.”.

Gopal Devanahalli, Vice President, Infosys BPO, believes the banking industry “will undergo big changes post the financial meltdown.” Increased regulation will lead to a focus on more outsourcing of such processes as treasury, cash management, and custody. He also predicts the intersection of mobile and social technologies will disrupt traditional branch banking, which will lead to more outsourcing.

Patel at Aditya Birla Minacs points out there is a huge pent-up demand in the midmarket, and these companies will turn to outsourcing as a strategy for becoming more competitive in the marketplace. (Also see Risks and Complexities in Outsourcing Decisions in the Midmarket.)

“Practically every industry today is grappling with challenges associated with the global financial crisis, increased regulatory compliance requirements, and content digitization / Web 2.0 environment leading to newer paradigms. There is a need to be able to respond agilely to the market through leaner, meaner organizations,” says V. K. Raman, Head, Domain Services, TCS BPO Services. This is especially true in the Banking, Financial Institutions and Insurance (BFSI), life sciences and healthcare, retail, and government sectors. Raman says these industries will drive outsourcing in the next few years.

Miles Lafferty, Vice President, Hinduja Global Solutions, believes currency fluctuation, particularly the U.S. Dollar and the Euro, and related cross-regional economic policy and ideology will create uncertainty in global sourcing decisions. “That said, this uncertainty will reduce the appetite of many organizations to build captive centers, thereby creating opportunity for outsourcing service providers.”

Regional hot spots

There was a definite consensus among the experts we interviewed regarding opinions on which regions will have more companies turning to outsourcing in the next two years to address their business needs (other than the United States or Europe). The top regions they cited are:

1. Asia Pacific
2. Middle East
3. Latin America
4. Japan
5. Australia
6. India

Most believe that the BFSI industry will lead the way in these countries, just as it did in the U.S. and European early adoption of outsourcing.

Japan is at the forefront because it continues to struggle with a difficult economic climate, says Schulman at IBM. He says that the driver for growth in Latin America and parts of Asia is the large numbers of organizations with a disparate spread of employees and business units across multiple locations and borders

Infosys BPO says the drivers in these regions are cost and process efficiencies at the lower end. But there is also some outsourcing of analytics related to understanding market customer behavior, as well as some outsourcing of vertical-specific functions.

Deepak Rastogi, Senior Vice President, Global Strategy at Hinduja Global Solutions, says ultimately much of the growth in these regions will be consumer driven in the telecom, financial services, and healthcare industries.

Business processes

Which business processes/functions will move to the outsourcing model in the next two to five years? Our experts listed the top three:

1. Analytics – The driver is the need to leverage fact-based insights to improve reporting results, recognize and understand potential opportunities, and deliver better business outcomes.
2. Manufacturing supply chain – Factors driving growth in this area are purchasing cost reductions, cash flow advantages, operations cost savings; and increased business effectiveness (such as shortage management and the capacity to implement advanced logistics models).
3. Work that today appears extraordinarily complex (such as industry accounting, external reporting, planning, budgeting, forecasting) will move to outsourcing as these processes become standardized.

Selecting a service provider

Charlie Bess, HP Fellow, HP Enterprise Services, advises that buyers in these hot spots should look at how service providers invest in making their processes more standardized and their capabilities more flexible, as well as what they are doing to prevent unnecessary business interruptions.

“Investing in automation, for example, is important,” says Bess, “but you need to look under the covers and see what the provider’s approach is when the automation doesn’t work. Rowing harder with new tools may not always be the right answer; you might have struck something unexpected and need to change course.” He advises buyers to ask: “What is the escalation process when the unexpected occurs?”

Abid Ali Neemuchwala, Global Head, TCS BPO Services, warns buyers to seek providers that have the ability to scale and grow across new geographies to support green field ventures.

According to Kohli at Wipro, the most important criteria should be whether the provider can show significant value beyond labor arbitrage and can deliver on the commitment. “All other criteria such as a combination of BPO and IT, cultural fit, quality, and scalability are reflected in the above two major criteria.”

Selecting healthcare service providers will be a big risk, according to Kohli at Wipro. “The key selection criterion should be the provider’s commitment towards timely and quality deliverables, as there is no scope for errors in this zero-error industry.”

Kholkar at TCS advises buyers’ provider-selection criteria should include cultural fit, relationship management ability, and certification from compliance authorities.

IBM’s Schulman says buyers should ensure that their service providers are able to view their processes at a granular level on an end-to-end basis including any portion that the buyer retains. “This is critical to truly understanding a client’s business and being able to effectively collaborate with them to optimize business outcomes.”