As the end of the year approaches, the predictions of what’s to come in the next 12 months abound. Of course, those predictions are usually quickly forgotten and no one rushes to issue a scorecard for how they fared — but that’s not the case at CIO.com. This year, we’re revisiting the 11 outsourcing trends we forecast for 2011 to find out which of them actually came to pass.
If we were a baseball team, we did great as just less than half of them were right on target. However, this is the IT outsourcing game where service-level expectations hover around 99.99 percent. And some of those predictions were strikeouts: Egypt takes center stage? A major merger between a big Indian and U.S. provider? Swings and misses.
As we pull together our 2012 prognostications, here’s how we rated those 2011 predictions:
IT Outsourcing Prediction Hits
IT leaders scour existing contracts for cost savings
Dive for dollars, they did. However, as Adam Strichman, founder of an outsourcing consultancy and price benchmarking veteran points out: “That was really a gimme. They always do that.”
“With constant budget pressures and CEOs and CFOs pushing to do more with less, many IT leaders are renegotiating their deals mid-term in an effort to generate incremental savings,” adds David Rutchik, partner with outsourcing consultancy Pace Harmon. But 2011 may have been the year that they reached the point of diminishing returns in this endeavor. “Much of the potential gains have already been achieved,” says Stan LePeak, director of research for advisory services at KPMG. “Contract restructuring, to bundle more work with one provider or take more work offshore, for example, will lead to greater savings.
Legacy outsourcing providers fumble their way into cloud offerings.
There’s been more talk about new “cloud services” from legacy outsourcing providers than there has been any truly new services, says LePeak. But that may have worked in their favor, at least temporarily, “with [cloud] networks getting breached more often and consumer data exposed,” says Mark Ruckman, an outsourcing consultant with Sanda Partners. “Security is the major concern with cloud, so essentially, they are repackaging the same offerings they always have had, and calling them cloud,” adds Strichman. “The legacy providers recognize the risks to security, customer data, and sharing of infrastructure and resources which clouds require—probably better that the cloud providers understand it.
Outsourcing providers hold firm on prices rather than conceding to demands for price reductions.
While there were certainly cases of price concessions by providers in 2011, there was often some kind of quid pro quo deal. “They caved some on price,” says Ruckman, ‘but requested longer terms,” in exchange. “No providers want to buy business or get into unprofitable deals,” KPMG’s LePeak says.”
American politicians preach protectionism and limited offshoring, but little comes of it.
With the 2012 elections on the horizon and American unemployment a hot-button issue, preaching protectionism and anti-offshoring continued to be a popular tactic on both sides of the aisle. But while 2011 did see continued scrutiny of H-1B and L-1 skilled worker visa applications and a lawsuit filed against Infosys for alleged misuse of the B-1 visitor visa program, there was little in the way of actual anti-offshoring legislation. A bipartisan bill that would penalize companies for moving call center overseas was introduced in December, but similar propositions have stalled in the past.
IT service providers attack labor costs through layoffs and increased offshoring.
All the major U.S. providers continued to ramp up offshore operations around the globe. And while Indian providers heavily marketed their U.S. hiring strategies, they too made most of their labor investments abroad. “Selective domestic growth is occurring,” says LePeak of KPMG, “though not as fast as advertised by some.”
Strikeouts on IT Outsourcing Predictions
A big merger between U.S. and Indian ITO provider occurs.
IT outsourcing observers have been predicting a mega-merger between a big name Indian provider and a major U.S. outsourcer for several years. Still hasn’t happened. “The capabilities of Indian outsourcing providers are being built up by multinationals and they see no reason to pay a hefty premium for acquiring these companies,” says Rutchik of Pace Harmon. “There may be a merger of Indian providers in the future to provide more scale to compete with the larger multinationals, but even this scenario has its hurdles as many Indian providers are still family-owned or controlled with ingrained cultures and business differences.”
China, Brazil and Egypt take center stage.
Egypt made headlines this year, but not for IT outsourcing. China is booming, but mainly as a provider of domestic and regional IT and business process services. “They haven’t figured out how to provide high-value services outside their borders,” says Michael Engel, managing partner at outsourcing consultancy HfS Consulting. Brazil, too, has a strong internal market for IT services “but service exports lag, in part because of restrictive trade policies,” says KPMG’s LePeak.
Close Calls on IT Outsourcing Predictions
Smaller IT services deals dominate the market, with activity creeping up by year’s end.
IT outsourcing deals did, indeed, get smaller this year. In the third quarter, we reported the IT services market’s first substantial decline in 12 months during the third quarter of this year with transaction volumes fell for both the IT and business process outsourcing markets. We won’t know if deal activity picked up in the final months of 2011 until after we’ve rung in the New Year. But with the continued uncertainty about the economy’s direction, it’s unlikely. “The big deals—$1 billion-plus—won’t happen until after mid-2012,” says Ruckman of Sanda Partners. “People are waiting to see the impact of the European issues and if China falters.”
Business users circumvent IT to make their own cloud computing deals, putting IT at risk.
Sure, business leaders were inking cloud services deals throughout the year, but IT leaders also got wise to so-called rogue IT deals. “IT departments are generally aware of all major technology-related activity in their company and are increasingly creating governance models to circumvent one-off cloud deals within the business” says Pace Harmon’s Rutchik. “And the business is getting better as seeing IT’s value, especially when it comes to vetting the offering, implementing and integrating them, and then managing them,” KPMG’s LePeak adds.
Providers embrace automation to protect margins, and sell such tools to clients.
It’s happening … very slowly. “They need to continue to separate the linearity between revenue and staff growth,” says LePeak, “But it’s easier said than done, especially for more complex work.”
Clients become open to changing internal processes and accepting standard services rather than insisting on customization.
Just as it was with legacy service providers and cloud computing (and with politicians and protectionism) so it went with IT outsourcing customers and the end of customization requirements-a lot of talk, very little action. “While many companies aspire to accept standardization, the majority of them aren’t able to hold to this position when working through business requirements-resulting in mostly customized options, even when they claim they have implemented ‘vanilla’ processes,” says Pace Harmon’s Rutchik. “Increased cloud usage will force companies to accept more standardized processes, but this issue remains a large barrier to more ubiquitous adoption.”
Stephanie Overby is regular contributor to CIO.com’s IT Outsourcing section.