Outsourcing Predictions for 2009

Low-hanging fruit outsourcing with immediate cost-savings will be strong. As we discussed and surveyed here, it’s areas where enterprises can streamline initial costs over a contract and get an immediate impact on the bottom-line. That’s bread-and-butter application outsourcing, high-arbitrage BPO areas such as Finance & Accounting and vertical-specific analytics (that KPO stuff). I am also expecting increased adoption of procurement BPO models as increased procurement and supply management work is moved offshore, and buyers can benefit from labor arbitrage to underpin the transformation costs that have held back adoption in the past.

Many initiatives which require incremental upfront investment that cannot be tied directly to revenue-metrics will suffer. The back-end of Q1, Q2 and Q3 2009 will be busy times for outsourcing deal activity.

The onshore/offshore decision-process is reversed to "why should this stay onshore?"The traditional evaluation methodology for companies’ outsourcing and offshoring opportunities is fast-changing. Rather than companies determining which processes can be carried out from a remote location, most will be determining why processes need to be carried out onshore.

Services firms will be forced to consolidate. With deals getting smaller and more plentiful, combined with renewed pressure on services firms to hold-back on hiring, the need for added global scale and staff resources, process and technology expertise, are going to drive consolidation at a much more aggressive pace than we saw in 2008. Most outsourcing service providers are currently waiting out the year to get a firm picture on how to address their go-to-market strategies after the New year. I predict these to take several forms:

• Large service vendors going for a pure scale-play. Like HP/EDS, we will see more mega-mergers to ramp up into that "mega IT-BPO" provider bracket. The "big 3″ could pull away from the rest of the market for some mega-deals and we will likely see other service providers combine to challenge.
  
• Offshore captive cherry-picking. There are some high-quality captives that are ripe for acquisition, that can give providers immediate entry into new industries, or consolidation in existing ones. In many cases, it is more appealing for service providers to invest in buying up clients than each other, but further devaluations in the stock prices of many service providers will create tough investment decisions for ambitious providers.
  
• Increased blending of IT-BPO offerings will drive vendor acquisitions. In many situations today, BPO is becoming a natural extension of an ITO relationship. This is especially the case where the service provider is willing to take on industry-specific processes that augment the IT services, for example supply chain merchandising with retailers, or check-and-lockbox services in financial services. There are simply not going to be "world-class" captives for sale to fulfill every industry need, which is going to force many providers to seek mergers. I anticipate some strategic acquisitionsbetween BPO-centric and IT-centric vendors. Those that choose to remain as pure-IT, or pure-BPO will get forced into the middle-market to scrap for smaller engagements.

Global HR strategies are moving to the top of the agenda. As we have discussed-to-death on this blog, one of the most redeeming facets of outsourcing is to become more competitive globally, to use a service provider’s skills and resources to enter new markets, or divest from others. One area of note has been the increase in firms moving onto global HR models where they have a much more integrated view of their global organization and can make much faster, more informed, decisions about their business and their workforce. The recent revival in global payroll and HR-IT outsourced services is testament to this growing need for firms to globalize their workforce data.

Survival of the fittest.Let’s not beat around the bush here… we’re in for a very