In today’s business environment offshore outsourcing has already grown from the exception to a commonly accepted norm. According to Gartner, the leading information technology research and advisory group, although the outsourcing market has matured in recent years, many companies still believe that offloading a problem solution to an external source is very likely to cause even more problems. Other issues fueling up downside of outsourcing are control and in-house skill dilution. For the outsourcing wave to gain exceptional prominence, new approaches towards vendor-client relationships and new performance objectives should be established. Herein TEAM International shares findings of the recent studies on and predictions to the future of offshore outsourcing.

On reviewing different predictions made by the most outstanding analysts of the offshore outsourcing trends, TEAM International came up with its own rating of 10 prominent predictions to the future of offshore outsourcing.

1. Leverage of current client portfolios by the offshore outsourcing services providers.

It goes without saying that the key factor driving modern organizations to employ offshore outsourcing is a profitability concern. On the other hand, this concern leads today’s largest offshoring services providers to standardize, consolidate, rationalize and leverage their existing client portfolio to be able to boost profits in the general outsourcing portfolio.

2. Focus on multidomain contracts and top line revenue growth.

In today’s business world the outsourcing services providers are focused on short-term revenue generation and margins rather than on top line revenue growth. Although companies’ desire to engage with lower-cost specialists is expected to increase tremendously over time, the approach is claimed to be different. Gartner predicts that in near future providers will weight their opportunities to gain market share against traditional bottom-line profitability. In their turn, buyers will carefully weight their attractiveness quotient against the background of the economic climate. More and more organizations are anticipated to begin regarding offshore outsourcing as a long-term healthy relationship and to stop considering outsourcing to be an immediate cost saving exercise.

3. Extended use of end-to-end business process outsourcing (BPO) model.

Today end-to-end BPO accounts for 20% of all offshore outsourcing deals and is expected to become the most common model in near future with each contract lasting 5 to 7 years and comprising significant throw of incremental revenue. This model typically requires from the vendor to invest significant costs in the first 1 to 2 years for asset transfer accommodation. It means that only large BPO services providers will be able to meet the rapidly changing clients’ needs. In today’s environment companies focused on instantaneous profitability and margins should change their tactic; otherwise, they will not be able to survive the tough competition in 5 to 10 years.

4. Extended use of standardized services and automation.

Today’s BPO industry already faces implications of standardized services and automation. Since most of providers are focused on leveraging what they already have, they do not enthusiastically welcome clients willing to offload their assets. Providers wishing to improve their solution must have such added value as access to significant resources and intellectual property. It is predicted by Gartner that in near future client executives will have to change their mindsets and will start considering automation as a way to save costs and improve performance quality. Providers willing to get large and comprehensive contracts will have to prove to their customers that they have appropriate technology leverage. The technology leverage will become one of the major indicators of vendor’s executive potential: the smaller the leverage, the less potential the vendor has to deliver promised cost savings profitably in a long run and vice versa.
As predicted by Gartner, in the future the only way to sustain cost reduction will consist in efficiency refinement through automation. In today’s offshoring environment sectors like payment services and payroll have already featured high quality delivery via automation and have proven the high efficiency of the transactional outsourcing. A good solution for the buyers to sustain their cost reduction by means of automation will be to develop shared-service centers jointly with their outsourcing vendors. Therefore, vendors able to offer innovative service delivery options and the new level of cost leverage through automation will be most wanted. Buyers having neither time, nor financial resources to receive efficiency gains internally will have to consider outsourcing as the only possible option allowing them to withstand competition.

5. Leverage of knowledge management.

In today’s business processes the operation cost associated with people’s salaries appears to be one of the greatest areas of efficiency gain. However, a lot of buyers are uncertain of how to drive automation internally without shattering their business strategies. The present offshoring services providers have little knowledge leverage due to several major errors: (1) they regard automation and commodity as synonyms and (2) they tend to employ a mixture of heavily customized technologies from their customers. To correct these mistakes in the future, the offshore outsourcing services providers will have to find a satisfactory balance between value-added knowledge workers and one-to-many core automation. This change will be achieved through smooth transformational processes: the service providers will have to create trust in the automation values throughout the enterprise and the service recipients will have to be involved in the selection and adoption processes at the earliest stages of the deal in order to determine how the automation will be affecting processes on a daily basis.

As per Gartner, although extended use of automation will obviously shorten the number of human resources involved in the processes, it will not affect the efficiency of labor intensive tasks’ delivery. Therefore, human resources will continue playing an important role in maximizing cost reduction through non-domestic delivery. However, savvy knowledge leverage will subsequently lead to IT talents playing the role of coordinators rather than mere executors.

6. Incorporation of IT outsourcing in Business Process Outsourcing (BPO).

According to a recent study by Warwick Business School and Cullen Group, mainstream BPO expenditures are predicted to grow globally by about 10% a year and are expected to reach nearly $220 billion by 2010.

7. More investments in active contract design and management.

Today’s cost of getting to contract falls between 0.4% and 2.5% of the whole contract value and ongoing management costs make 3% to 8% of the contract value. As predicted by Warwick Business School and Cullen Group, these costs will definitely rise and clients’ ability to manage offshore outsourcing arrangements will improve slowly, but fundamentally by 2010. This prediction is based on the fact that at present senior management and CEOs already eagerly get involved in offshoring contracts’ design and management.

8. Significant growth of the global Shared Services and Outsourcing (SSO) market.

A recent study by Frost & Sullivan, global growth consultancy firm, predicts that by 2009 the SSO market will grow by 15% and reach $1,430 billion accordingly.

9. Slow, but steady development of Document Process Outsourcing (DPO).

In today’s business environment DPO is considered to be a relatively new client-focused category of the document outsourcing. In recent past the major revenues in the document outsourcing market were derived from on-site contracted services. As projected by InfoTrends/CAP Ventures, by 2009 DPO will experience a compound annual growth rate of 4.0% and will reach as many as $38.3 billion. DPO is predicted to grow faster than three traditional segments such as on- and off-site contracts and statement printing. In search for minimizing corporate investments in non-core support areas, companies working in document management market will be likely to offload their copy/content writing and other processes to vendors in order to gain benefits of the latest technologies. Offshore outsourcing will also enable document management customers to increase investments and focus on differentiating activities.

10. Passage beyond traditional offshore outsourcing hubs.

According to CIO.Com, today’s traditional offshore outsourcing destinations like India are greatly challenged by wage inflation, infrastructure strains and talent attrition. It is expected that by 2009 IT services’ delivery capability will be extended beyond India and will embrace Eastern and Central Europe, Latin America and the Middle East.
CIO.Com points out that while most of the companies were ‘pumping their cost savings’ from India, the alternative hubs were patiently investing in appropriate infrastructure development. According to Gartner, another huge advantage of alternative outsourcing destinations such as, e.g., Ukraine and Russia are prominent R&D basis established at the time of the Soviet Union and top quality of higher technical education that allows access to a vast talent pool.

Summarizing the above findings and predictions, TEAM International would like to point out that in near future an offshore outsourcing model will be largely affected by the following factors: strive for long-term partnerships, top-line revenues and innovation; extended use of automation and knowledge leverage. TEAM’s internal analysis of the future outsourcing trends allows to agree with the above predictions that in near future most of vendors will realize the importance of focusing on market share gains and process standardization as well as multiclient portfolios, since being tailored to a single client suggests low profit margins for sellers and poor cost reduction for buyers.

The preceding is based on information retrieved from Gartner (www.gartner.com), CIO.UK (www.cio.co.uk), Computer Business Review (www. cbr.co.za), InfoTrends (www.capv.com) and Public Technology (www.publictechnology.net).