1 Six key trends in outsourcing Dominic J. Asta
2 /02 Outsourcing has never been the same as offshoring, yet it seems the two concepts have become increasingly interchangeable over the past decade. Despite the long history of outsourcers as leaders in innovation and in delivering practical workforce management solutions, offshoring has increasingly stolen the spotlight and thunder (and not always in positive ways).
3 Introduction /03 Offshoring continues to be seen by some as a necessary evil. Yet, our ongoing partnerships and candid conversations with leading organizations and corporate clients around the world are showing encouraging signs that the outsourcing conversation is maturing. Instead of a choice between expensive local consultants and cheaper offshore labor, it has become apparent we need more than just these two operational models to run the businesses of tomorrow. Outsourcing, in all its forms, is rapidly reshaping work as we know it, and at the same time, the economies of both developed and emerging nations. Here are our top six trends in outsourcing for 2013/14. We hope you join the conversation.
4 /04 80% of customers today have been outsourcing for more than 10 years IAOP survey
5 1 /05 It s no longer primarily about cost
6 It s no longer primarily about cost /06 Entire economies have been built on the outsourcing wave, and by all measures, the quality and efficiency of such services have greatly improved. It is now clear that emerging nations have cornered the market for low-cost, scalable capabilities in some business-critical areas. As a result, many businesses are now forced to justify why they are not outsourcing at least some aspects of their business processes, instead of defending why they are. Keeping some capabilities within highcost, developed economies can now appear like the less innovative and even less logical option. Outsourcing has become, for all large organizations, part of doing business. However, cost-savings are no longer the primary reason for organizations large and small to consider outsourcing. Often ahead of price, these three issues are central to the decision to outsource, and sometimes to offshore: 1. Competitive agility: the ability to respond quickly to new contractual needs, new opportunities and changing market conditions. 2. Scalability: the need to better manage unforeseen and seasonal demand and access just-in-time talent.
7 It s no longer primarily about cost /07 3. Innovation: investment in critical research and development, and the ability to access high-demand, low-supply talent in order to deliver innovative products and services in a timely way. Those organizations that have moved some of their business processes offshore say they are more flexible and agile, and [are] better able to adapt to competition in challenging economic environments 1. A recent International Association of Outsourcing Professionals (IAOP) survey also demonstrated that 80% of customers outsource to improve business performance and their overall operating model price is not the primary factor even if it is an ancillary benefit. The other key reason that offshoring efforts are no longer primarily focused on costsavings is simply that it is not always cheaper to offshore, hence trend number two. 80% of customers outsource to improve business performance and their overall operating model price is not the primary factor even if it is an ancillary benefit. 1
8 /08 2 Nearshoring is becoming more prevalent
9 Near-shoring is becoming more prevalent /09 Near-shoring is gathering pace within higher cost, high-talent labor markets as outsourcing moves into strategic activities. The shift away from the belief that cheaper is better is already taking root in the United States and other developed economies for which quality is again the crucial differentiator. In fact, an HfS Research survey shows that the US is currently seen as the world s most desirable region to expand IT, with more service delivery centers being added over the next two years. As many routine IT tasks becomes automated, and the incremental benefits from labor arbitrage are diminishing, the global labor pool for IT outsourcing will continue to shrink. As the talent pool becomes smaller and more expensive, and routine tasks are undertaken by machines instead of people, the demand for more highly skilled individuals rises. This further diminishes the prospect of outsourcing these tasks to significantly lower-cost labor markets. In fact, IT outsourcing contracts dropped a full 20% from 2011 to 2012, and a recent Gartner report says that the combination of these factors will result in outsourcing of IT services overseas dropping by at least 15% through to % reduction 2012 IT outsourcing contracts dropped a full 20% from 2011 to 2012 and outsourcing of IT services overseas may drop by at least 15% through to 2016.
10 Near-shoring is becoming more prevalent /10 Over time, clients have become acutely aware that customers in developed economies may desire lower prices, but they will rarely accept lower standards of service along with it. A better compromise in some instances is to near-shore to hubs of specific talent and expertise. As such, companies are now seeking near-shore outsourced solutions where costs may be contained, but where high-quality talent can be found, and where fewer logistical, cultural and language barriers exist. For the US, options in Central and South America, Mexico and Canada will continue to be attractive business process outsourcing destinations into the near future, particularly as rankings around labor productivity growth, infrastructure spending, post-secondary education enrollment, and broadband access dramatically improve in developing Central and South American countries. Alongside this, employers seem to be indicating that more centralized control of capital with improved touchpoints is what they are seeking. Insourcing and near-shoring of projects or programs, especially for more strategic work, allow for more customized solutions that better integrate into an organization s culture and provide the transparency they desire.
11 3 /11 Outsourcing is increasingly applied by function
12 OUTSOURCING IS INCREASINGLY applied by function /12 Efficiencies found in early applications of outsourcing have also transferred to lower-volume, higher-touch functions. Outsourcing has steadily assimilated more and more complex, strategic functions and many that provide expertise by industry, process, regulatory oversight, or job function. Today, outsourcing solutions are often customized by industry or organizational vertical, e.g. FAO, CRO, RPO, CWO, and HRO. Last year, the BPO market alone grew by 12%. Within the US, outsourced services, both new and renewal, total some $1bn annually. And, an HfS survey has anticipated the BPO services market to grow at 5.1% in 2013, and 6.0% CAGR to Financial/accounting and HR outsourcing were the two fastest growing areas, as existing clients expanded scope and services. The CRM market is expected to grow more rapidly in 2014 as clients buy more value-added services around social media and analytics. In a 2012 survey by Deloitte, of those companies that use outsourcing: 76% reported to currently outsource some aspect of IT; 81% predict future IT outsourcing. 30% currently outsource HR functions, and 46% predict outsourcing in the future. 37% reported currently outsourcing accounting/ finance space and 53% expect to do so in the future.
13 OUTSOURCING IS INCREASINGLY applied by function /13 The general value proposition of outsourced models has evolved steadily to apply to more strategic functions, and both hard and soft savings can be realized in these more complex areas. If business process outsourcing is to successfully make the transition from only non-core and non-strategic functions to include strategic ones, it requires a different operating methodology that incorporates more of a partnership with the client organizations. From tighter integration, clients will have better transparency to influence outcomes. This insight and collaboration should help to drive more seamless service, improved business continuity, and better on-going communications in outsourced workforce solutions. See following diagram
14 Business processes and deliverables /14 HISTORICAL PRESENT DAY OUTSOURCED non-core/ non-strategic OUTSOURCED non-core/non-strategic non-core/strategic INTERNAL core/strategic INTERNAL core/strategic
15 4 /15 Outsourcing is expanding among mid-sized operators
16 Outsourcing is expanding among mid-sized operators /16 Smaller organizations may stand to gain more from outsourcing than larger ones. Some 73% of mid-size companies report plans to expand existing offshore business processes over the next months, compared to 55% of respondents to the same question a year earlier. $US147 B $US191 B 2015 Conversely, just 41% of larger companies are planning to expand their offshoring of business processes in the same period, down from 52% in the previous year. And, it appears smaller organizations can find the outsourcing journey more useful and effective. According to a survey of 277 outsourcers by analyst firm HfS Research and the London School of Economics, 63% of mid-market buyers said their outsourcing initiatives had been very successful at reducing costs. This compares to 44% of large companies. In addition, the following points were revealed: Some 42% of mid-market buyers said their deals were very effective in meeting compliance and regulatory requirements, compared with 30% of large companies; and 33% said outsourcing had given them more effective global operations, compared to 18% of large companies The International Data Corporation (IDC) forecasts global revenues for business process outsourcing to rise from $US147 billion in 2010 to $US191 billion in
17 5 /17 Outsourcers and clients are in direct competition for talent
18 Outsourcers and clients are in direct competition for talent /18 As outsourced work becomes more strategic and of higher value, more talented workers want to do it. Cutbacks over the past five years in many industries have done two things. They have: left management wearing more hats and doing more with less, and driven more people into contract work. As a result, the flexibility and expertise offered by outsourced talent is becoming a self-reinforcing cycle. As more work has been made available in this way, the more attractive (i.e. reliable and interesting) it has become to talented workers. And, as fulltime positions have become less secure, more stressful and have enabled fewer training opportunities and less support, talent is increasingly finding these things in the contract/ outsourcing environment instead. As outsourced work moves away from the non-strategic, non-core space into higher value, strategic tasks, people with highly specialized skills that are in high demand will have even greater incentives for taking on flexible contract roles. So, when organizations compete for this kind of talent, increasingly they are doing so in direct competition with
19 Outsourcers and clients are in direct competition for talent /19 outsourcers of all sizes. Client companies are also competing for this kind of talent without the perceived benefits of a permanent role on their side anymore. This can make it difficult for some organizations to fill critical roles on a permanent fulltime basis, particularly for roles requiring those specialist technical skills that are already in high demand. As the benefits of working in a permanent role diminish and the quality of contract roles increases, access to talent will become more about offering the employment terms (often flexible ones) that the talent is looking for, rather than simply selling the desired employee a job.
20 6 /20 Structures & processes are becoming more formal
21 Structures and processes are becoming more formal /21 Since the turn of the 21st century, the outsourcing industry has steadily become more formalized. Today, a vast number of leading professional associations, for both organizations and individuals, are involved in transforming the world of business through outsourcing, offshoring, and shared or managed services. This trend will only help to improve consistency around all components of outsourced solutions as the industry moves forward. It will also continue to provide for better governance of relationships between outsourcing providers and clients. Consider for example, expanding organizations such as the International Association of Outsourcing Professionals (IAOP ) a global, standard-setting advocate for the outsourcing profession, boasting a global community of more than 120,000 members and affiliates worldwide. Roughly 85% of its members credit the IAOP for improved outsourcing outcomes at their organizations, while 93% of the IAOP Certified Outsourcing Professionals (COPs) surveyed report that the designation has had a positive impact on their careers. 93% of the IAOP Certified Outsourcing Professionals (COPs) surveyed report that the designation has had a positive impact on their careers.
22 Structures and processes are becoming more formal /22 The Outsourcing Institute (OI), a neutral professional association dedicated solely to outsourcing since 1993, offers free membership to a global network of more than 70,000 executives, practitioners, and experts across the industry. There are also other tools and networks that are making it easier and more efficient for outsourcers to contribute to industry-wide discussion and demonstrate thought leadership. The Shared Service and Outsourcing Network (www.ssonetwork.com) is just one example, but there are many. A more formalized structure and set of expectations across the industry will further establish common standards for measurement, and key indicators to help monitor the performance of processes and the overall levels of any provider s suite of services. Ultimately, this is a very positive trend, which reflects the ongoing success of many outsourced relationships, and will otherwise serve as the basic foundation for best practices and many innovations to come.
23 References: / / Assessing Sourcing Operational Effectiveness and Maturity, Duke University FUQUA ORN; 2/ / / IT Services and BPO Market Size and Forecast, , HfS Research; 2/ Unlocking the Value of Outsourcing: A Global Economist s View, CBRE; 2/ Choosing the Right Processes to Outsource, Pactera; 2/ State of IT Outsourcing, InformationWeek; 09/ CIOs to Accelerate Outsourcing in 2013, Bluewolf; 08/29/ Business Process Outsourcing Trends to Watch in 2012, Datamark; 12/01/ Business Process Outsourcing Trends to Watch in 2013, Datamark; 01/03/ The Death Of Outsourcing, and Other IT Management Trends, Forbes; 12/28/ A Dozen IT Predictions For 2013 and Beyond, Gartner; 10/24/ Outsourcing, Today and Tomorrow: Insights from Deloitte s 2012 Global Outsourcing and Insourcing Survey, Deloitte; 5/ State of the Outsourcing Marketplace 2013, Sylvan Advisory; 1/ Outsourcing s Global Value: A Panel Discussion, IAOP 2013 Outsourcing World Summit; 2/ Is Good Enough Really Good Enough? The Great Talent Paradox in Outsourcing, HfS; 4/2013
24 For more thought leadership go to talentproject.com About the author Dominic J. Asta is Vice President and Americas Practice Leader and is responsible for strategy, brand relationship management, and business development support for the Business Process Outsourcing practice of KellyOCG in the Americas. Prior to joining KellyOCG in 2008, he held global leadership positions in finance and accounting, procurement, sales, and business development. He holds a bachelor s degree in management from the University of Michigan-Dearborn. He is also a Certified Outsourcing Professional (COP) with the International Association of Outsourcing Professionals (IAOP). About KellyOCG KellyOCG is the Outsourcing and Consulting Group of workforce solutions provider Kelly Services, Inc. KellyOCG is a global leader in innovative talent management solutions in the areas of Recruitment Process Outsourcing (RPO), Business Process Outsourcing (BPO), Contingent Workforce Outsourcing (CWO), including Independent Contractor Solutions, Human Resources Consulting, Career Transition and Executive Coaching, and Executive Search. KellyOCG was named in the International Association of Outsourcing Professionals 2013 Global Outsourcing 100 list, an annual ranking of the world s best outsourcing service providers and advisors. Further information about KellyOCG may be found at kellyocg.com. EXIT