As outsourcing matures, new trends emerge

Utility services and modular, or "component," offerings are trends that are emerging as the outsourcing industry reaches a new level of maturity, according to industry insiders gathering at OutsourceWorld in New York this week.

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Now that a wide variety of users and providers have attained hard-won experience in outsourcing, particularly in offshore contracts, services are moving to a new level of sophistication, said vendors and consultants here at the show.

Offshoring has moved well beyond the top multinational companies, which have been outsourcing globally for decades, according to Peter Bendor-Samuel, chief executive officer of outsourcing consultants the Everest Group. "We have moved well beyond the Global 1000," he said in a keynote address at the conference, which ended Wednesday.

The trend will continue, other conference speakers agreed.

There are currently about 1 million IT and BPO (business process outsourcing) jobs being fulfilled on an offshore basis, but that could increase to 6 million or 8 million over the next 10 years, said Allen Weinberg, principal and North American leader of McKinsey & Co.'s offshoring practice.

Both service providers and users have become more sophisticated in how they manage offshore service relationships, conference panelists said. On the customer side, companies are beginning to move away from vast, multiyear contracts because they have found that such deals are extremely hard to manage.

"Among other things, at the end of a five-year contract you realize the world is not the same as when you started, technology has moved on, and costs have come down," Bendor-Samuel said.

Costs have come down as providers in large countries such as India and China have bulked up, and as more specialized providers in Eastern European countries and other locations have stepped in to take a slice of the outsourcing pie, he noted. As a result, companies are moving toward more well-defined, limited-scope deals.

One example of this trend is the move toward component, or modular, services, especially in the financial arena.

"Financial companies are increasingly coming to us to provide componentized services, for example, helping them get a particularly sophisticated product to market quickly," said Wendy Watson, managing director of State Street Investment Manager Solutions, a branch of State Street Corp.

Banks are under increasing pressure to get to market with the latest investment opportunities in, for example, derivatives -- which can be very complicated, she noted.

"Companies that may not have the necessary technology or expertise to bring out such a product come to a provider like us," Watson said. Bond company Pacific Investment Management Co. LLC, for example, is experiencing a doubling of its transactions, but the complexity of these transactions is increasing fourfold as its financial products get complicated, Watson said. This is where a provider of specialized or modular services can step in, she said.

Specialty services offered for particular vertical markets are also becoming popular, other speakers at the conference noted.

"Cross-company outsourcing, companies coming together for scale, is a model that is increasingly being adopted," said Peter Watkins, head of U.S. financial services for Electronic Data Systems Corp.

Watkins pointed to the insurance sector as an example of an industry where companies have found they can bring down the cost of, for example, administering policies, by outsourcing administration to providers who offer so-called utility services. Cost savings can decline from about US$30 per policy to less than $10 per policy, Watkins said.

Particular countries or regions can also offer specialized services or opportunities, according to Watkins and other speakers. "Best-shoring" is a trend among users who look outside of traditional outsourcing centers in locations such as India to find niche specialties, or simply to find providers in the same time zone as their in-house workforce, he said,

Companies such as GE Corp., for example, have vast offshore operations in India but also have looked to near-shore, second-tier outsourcing providers in Mexico, he said.

Some industry insiders at the conference advised users to first pick the country or region that seems to offer a fit in terms of specialization, or language and culture, and only then pick the specific provider. "I always say, pick the country first, " said Shailendra Palvia, managing director for the Center for Global Outsourcing.

Romanian service providers, for example, are offering expertise in a wide variety of languages, proximity to various European markets, and a skilled workforce honed by a university system that has a strong background in mathematics and engineering, said Costin Lianu, general director of export promotion for the Romanian Ministry of Economy and Commerce, in an interview on the sidelines of the conference.

At the conference exhibition, providers from major outsourcing destinations in India, China and the Philippines were represented, but there was a also a strong showing of smaller companies from Eastern Europe, South America and other regions.