Out with the old and in with the new — well, almost! We do see “retro” back in fashion in some areas of the outsourcing market when looking ahead to 2012. What follows are nine key trends that CIOs can expect in the coming year in terms of outsourcing and global services.

1. Demand outlook is bright, with some points to consider.

  Demand will weaken initially, but then should improve by mid-year. The inhibiting factors and pain points will be:

• Continued tight budgets.
• Minimal discretionary spending, with approvals requiring rigorous ROI explanations. The majority of investments will need to show positive ROI within the fiscal year and, as a result, lead times and planning cycles will be short.
• Most IT budgets will be approved on a rolling monthly or quarterly basis.
• Systems integration, led by standardization and migration to common global processes, will lead growth. Simplify remains the buzzword for CIOs.
• Cloud computing offerings will stimulate greater demand for infrastructure outsourcing. Outsourcing providers, therefore, will revamp the architecture of their product offerings to fit the modular needs of a cloud environment. As a result, buyers moving to the cloud will create a big demand for redesigning software architecture, and also for quality assurance and testing services.
• The ROI of business process outsourcing will continue to be challenged. As providers support clients in this sourcing area, we see a lack of domain skills on their teams hindering deals.
• Outsourcing by midmarket companies will be on the rise, with much attention paid to platform-based, bundled outsourcing and transaction-based pricing. Typical examples are payroll and hosting services.

2. Operating models are going retro.

There are some contradictions affecting the market. On the one hand, clients frustrated with suppliers’ rising costs, governance challenges and uneven performance are exploring in-sourcing more often. At the same time, continued hiring and attrition challenges at global businesses, and overall governance requirements, will accelerate buyers’ move to managed services models. This will need to shake out over the year.

3. Professionalization of outsourcing will increase.

Supplier management and governance challenges will also spur the need for professionally trained managers. Programs such as the Certified Outsourcing Professional (COP) from the International Association of Outsourcing Professionals (IAOP), and training workshops will be leveraged more often.

Additionally, customers will increasingly see clear differences among suppliers in the services sector versus other outsourced product categories. As a result, high-quality procurement managers will be in greater demand.

4. M&A will continue, but yield few benefits.

Small acquisitions, focused on specific domain knowledge, will continue among suppliers. The gap between high-end Tier 1 and smaller Tier 2 providers is wide — now including billion-dollar firms that have yet to stake a lead claim in their category; they need clearer differentiation.

Some niche, or Tier 2 players, will continue to prosper, but focus is key to their success. There are no clear leaders in this category yet, and CIOs need to ensure that detailed due diligence is done when selecting a Tier 2 partner. Assess whether there’s a good fit when it comes to your future plans and their investments.

5. Pricing is expected to be flat in spite of many upward pressures.

Continued pressure on suppliers will lead to flat — but not lower — pricing compared to 2010/11 levels. Moreover, weak exchange rates and the weakness of the U.S. dollar will put increased pressure on suppliers. This could be the time for businesses to get good deals on contract terms. Increasingly, outsourcing will move away from staff augmentation/time and materials toward output-based pricing and managed services.

6. Hiring and utilization will strengthen.

Expect to see more new-graduate hiring by suppliers as a result of market growth and the need to reduce costs. The better firms will continue to operate with staff utilization in the high 70 to low 80 percent rates. In addition, hiring in newer geographies — such as Brazil, China, Colombia Mexico and Poland — will divert some attention away from India.

7. Wages will rise, creating greater pressure on margins.

Higher inflation is causing wages to rise 10 to 15 percent in India and  many other Asia/ Pacific locations, while the U.S. and Western Europe will           see much smaller raises. Latin American wages will rise more than 8 percent.

8. Proactive risk management is important to the continued growth of the outsourcing industry.

More attention will be paid to the diversity of one’s geographic  portfolio, and there will be greater concern with monitoring risk and     compliance in case of disruption at supply locations.

9. Rising geographies will take market share away from traditional locations, but the overall pie is growing.

Eastern Europe and Central and South America are surging, and buyers will increasingly draw on suppliers’ global delivery models to provide time-zone coverage and to realize true 24x7x365 support. Offshore players will also continue to expand and/or set up operations in new geographies such as Brazil, China, Colombia, Mexico and Poland.

In conclusion, expect something new, something old and something borrowed in global services and outsourcing as we head into 2012. But most importantly, expect frequent change and avoid going long on risk.

Atul Vashistha is Chairman of Neo Group, a global advisory firm that helps clients source, monitor and manage global sourcing, program management and supply risks.

Staffing augmentation.  Labor arbitrage. India. For many, outsourcing seems to be defined only by the above terms – people working for low compensation in locations such as India, helping a business to save significant money.

However, the recent and continuing economic downturn has upset many notions and business models that have been in place for over a decade and outsourcing is no exception. What was once considered to be the norm is now in flux and requires different responses from service providers and customers.

New Call Center Models

Take for instance, the call center. At one time, India was the only market for this service. More recently, however, other markets such as the Philippines and Costa Rica are proving to be proficient in the provision of voice-based customer support services.

More shifts and changes like these are likely to continue. In particular, markets with newer skill sets and technologies are on the rise. Brazil and Russia, for instance, are increasingly emerging as premier destinations for complex engineering and applications activities. And other destinations such as Latin America, appeal to U.S. businesses because they are in the same time zones.  

Furthermore, the overall notion of which countries are the suppliers of IT services and which are the recipients is changing as well. Take the case of Bharti Airtel, one of India’s major telecom companies, or Bancolombia, one of Colombia’s major banks. One of Bharti’s primary growth strategies has been to outsource most of its operational functions and activities to external entities-- including what most other telecom companies across the world would consider to be “core” activities such as network roll out and maintenance, customer acquisition as well as customer support. In this endeavor, U.S.- based IBM has been Bharti Airtel’s major strategic partner, to whom the latter has outsourced a diverse range of business functionalities, including a major chunk of its customer care operations.

In the second case, TCS and Infosys are assisting Bancolombia to transform its technology and infrastructure. Thus, outsourcing today can work across any geography and can be undertaken in virtually any direction – west to east or vice versa, as long as the primary goal of business value addition is achieved.

Rethinking Low Costs

Further, we find that a lot of the assumed low-cost destinations are losing that distinction. Again, take the case of India. With a booming economy and jobs not too difficult to come by, salaries in the country have been continuously witnessing an upward spiral. Year after year, surveys undertaken by Hewitt on salary trends across the world clearly show an upward revision in India. In fact, while salary levels in India grew by an average of 6.6 percent in 2009, this year, salary levels are quite likely to increase by as much as 10 percent , according to a recent study .

Firms looking to outsource their business functionalities to leading and rising destinations like India, China or Mexico need to be wary of macroeconomic conditions or they stand to lose value rather than actually gaining, from the entire exercise.
Along with business value, risk management and risk mitigation definitely begin to play an even greater role as increased operations are outsourced. Any prospective outsourcing destination needs to be assessed at multiple levels. Broadly, these levels could be summed up as:

• Country-level risks

• City-level risks

• Supplier-level risks

Within these risk levels are a broad range of sub-levels that need to be further assessed. Financial risk would of course be common to each of the above three risk levels. And at the country and city levels, aspects such as human resources, infrastructure, and geopolitical risks are paramount before any definitive outsourcing mandate is finalized. In the same breath, if we are to narrow the risks at the supplier level, we could be looking at risks such as strategy, service capability as well as risks arising out of the complex client and service mix that the supplier holds.  

Some businesses aim to mitigate these risks by insourcing, rather than outsourcing key services. We may, therefore, witness the growth of new U.S. locations –where unemployment is high and employees are plentiful-- that could serve as excellent pockets for business-support services. While not competitive with the likes of India-- places such as Omaha or Ann Arbor are increasingly emerging as excellent destinations for outsourcing within the U.S.

In any case, an evolution is under way in the relationships between clients and vendors. In the past, the focal point of these relationships had generally been the resources that the vendor had at its disposal. Such a perspective is likely to change in favor of Service Level Agreements that will allow the whole service process, and the service commitment being made by the vendor, to be clearly stated to clients. The shift to the SLA signifies a much needed correction in perspectives. It also implies that niche outsourcing centers, which might do better quality work than their bigger counterparts, now stand good chances of winning quality assignments.

Pricing, one of the most important aspects of outsourcing to most users, is experiencing major modifications as well. The trend is moving away from broad-level, volume-based or even hourly-based pricing mechanisms in favor of transaction based and outcome/gain-share pricing.

Knowledge Management

Across all these initiatives, knowledge management will always play a vital role. The ‘drill down’ approach of the past, where the clients retained the brains and the vendors merely acted as pawns in their hands, will very likely become passé. Instead, the emphasis will be on collaboration and mutual-value addition—what I call ‘collective intelligence,’ whereby clients and vendors come together to apply their thoughts toward the mutual goal of addressing their respective business needs.

How will all this be achieved? Well, for starters, through better deployment and application of technology. I anticipate a great deal of convergence of portfolios, programs, projects and resources as well as performance management. As part of this shift in emphasis, I believe that program management and governance is about to get specialized and outsourced.

In all, a series of changes – in the way outsourcing is perceived as well as practiced—is under way. Eventually, these changes may serve as a guiding light for better business practices as outsourcing matures and the world globalizes even further.

-- Atul Vashistha

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Atul Vashistha is founder and Chairman of Neo Advisory (formerly neoIT), a leading management consultancy since 1999. Neo offers independent advice to enterprises that seek to transform their organizations by outsourcing and globalization. Vashistha is also founder of Neo Group, a firm offering solutions for managing, monitoring and improving supply relationships. His latest venture is BestOutsourcingJobs.com, an online employment solution focused on outsourcing careers. He is a member of Smart Enterprise Exchange and can be reached on this site.

1 Results of Hewitt Associates survey as seen on MoneyControl.com