4/05/2008

Top50 Service Outsourcing Providers in China Unveiled

Following the great global transfer of manufacturing started in seventies of last century, the global transfer of the service industry has taken the first place as a new tide. And offshore outsourcing, as the keystone of the new-round global integration, brought Chinese companies both opportunities and challenges.

2007 Top 50 Service Outsourcing Providers in China by Chinasourcing is the first company list in China that faces the whole service outsourcing industry aiming at present the best Chinese outsourcing companies to the global outsourcing market so as to strengthen their international competence and get more business opportunities in the offshore outsourcing market.

Based on data and practice, the List went through the processes of “activity publish”, “company searching”, “quality auditing”, and “experts evaluating” etc. and integrated the investigation results of nearly 4000 Chinese companies and over 400 overseas outsourcers’ service feedbacks to cover the best representatives in China’s ITO and BPO domains. And the companies on the list represent the whole level of China’s service outsourcing industry and especially the best practice in offshore outsourcing in 2007.

The sponsor, Chinasourcing (www.chnsourcing.com), is the only portal and e-commerce platform for China’s offshore outsourcing industry with more than 4000 members. In 2007, Chinasourcing has successfully introduced 653 offshore projects to China with extensive international influence. The whole outsourcing industry has attached great importance to the list ever since the first day, and the relevant information and documents have already become an important approach and channel for overseas outsourcing buyers to find suitable Chinese partners.

The list and relevant materials were published by Chinasourcing (www.chnsourcing.com) on March.8th, 2008. And the list would be annually updated and released from now on.
Chinasourcing - 2007 Top 50 Service Outsourcing Providers In China
Rank Company Industry
1 Dalian Hi-Think Computer Technology,Corp. Software
2 Beyondsoft Group Software,ITO,BPO
3 iSoftstone Information Service Corporation Software,ITO,BPO
4 Inspur Group Ltd. Software,ITO,BPO
5 Chinasoft International Ltd. Software,ITO,BPO,Call Center,HRO,Data Entry
6 China Data Group (Beijing) Co.,Ltd. ITO,BPO,Data Entry
7 Objectiva Software Solutions Software
8 CompuPacific International BPO,Call Center,Data Entry, Finance Outsourcing
9 Shanghai Venus Software Co. Ltd. Software,ITO
10 Sykes (Shanghai) Co.,Ltd. BPO,Call Center
11 Suzsoft Company Limited Software,ITO,BPO
12 Chengdu Sofmit Co.,Ltd. Software,ITO,BPO
13 BroadengateGate Software Services Co., Ltd. Software
14 Chongqing Zhengda Software (Group) Co., Ltd. Software,ITO,BPO
15 Intasect Communications(Chengdu) Co.,Ltd. Software,ITO,BPO
16 Shanghai Wecosmos Information Techonology Co.,Ltd. BPO,Call Center
17 PCCW Teleservices BPO,Call Center,HRO
18 Total Logistics (Shenzhen) Co., Ltd. logistics
19 “Sunny Information Technology Service;Inc” ITO,BPO,Call Center
20 Nova Workvision Technology Co., Ltd. ITO,Data Entry
21 Shinetech Software Inc. Software
22 Beijing Jianfeng Computer Systems, Co., Ltd. Software
23 Beijing Increase Technology Development Co., Ltd. Call Center
24 Novots Technologies Limited ITO,BPO
25 HANGZHOU EHARMONY TECHNOLOGY INFO.Co., Ltd. ITO,BPO,Call Center
26 Visto (Tianjin) Co.,Ltd. R&D
27 Sino Data System Co., Ltd. Software,ITO
28 JiangSu Oceansoft Information System Co., Ltd. Software
29 Digital China Financial Software Ltd. ITO,BPO
30 Affiliated Computer Service(Tianjin) Co. Ltd. HRO
31 Jinan Enput Data Service Co., Ltd. BPO,Data Entry
32 Institute of Digital Media Technology (Shenzhen) Limited Software,ITO
33 Image Solution Inc. BPO
34 Global Data Solutions Ltd. ITO
35 Join Innovation Technology.Co.,Ltd. BPO,Data Entry, Finance Outsourcing
36 ExperExchange, Inc. Software,BPO,Data Entry
37 Cosoft Co., Ltd. ITO,Call Center,Data Entry
38 Anqing Shenhong Internet Technological Service Co., Ltd. BPO,HRO,Data Entry
39 Xi’an Caro Technologies R&D Limited Corp. BPO
40 Xi’an Yuri Software Co., Ltd. Software,ITO,R&D
41 Shanghai Digital Information & Technology, Inc. Software,ITO
42 Tianjin Mammoth Technology Co.,Ltd. Software
43 Xi’an seavision tech limited corporation Software,ITO,BPO
44 Shanghai Huateng Software Systems Co., Ltd. Software
45 TIANJIN SHENCHI SOFTWARE Co., Ltd. Software,ITO
46 Beijing Eskalate Technology Co..Ltd. Software
47 Great Wall Certified Public Accountants Company Limited BPO
48 Jiamasoft Technology Co., Ltd. Software,ITO,BPO
49 Epic Business Solution Software
50 ZTsoft Co., Ltd. Software,BPO

11/09/2007

Trends in the Outsourcing, Shared Services and Offshoring Market

Alsbridge CEO and Collaborative Outsourcing pioneer, Ben Trowbridge, says, as the outsourcing industry moves into 2007, higher priority must be placed on staying cost competitive and staying ahead of global trends in the sourcing market.

"Companies want to see the results of their sourcing projects turn out successfully," observed Trowbridge. "In this regard, we believe our predictions of the market will prove beneficial to industry leaders and buyers in all stages of the sourcing lifecycle."

Alsbridge proprietary data, public information and current industry trends have led Trowbridge to offer his predictions for 2007:


Because of a tightening U.S. labor supply in technology, accounting and other processes, U.S.-based companies will accelerate their outsourcing strategies to stay competitive.

Contrary to prevailing opinion, cost of labor in India will remain neutral when compared with wage inflation in the U.S. The offshore trend will not subside.

Contrary to prevailing opinion, China will still lag other markets, mainly India, as a destination for English language driven BPO, or shared services centers due to language, low national birthrate, Intellectual Property and other legal issues. The exception will be those companies who have a market strategy to sell into the China market, which will override the former comments.

New areas of Eastern Europe will open up and should be evaluated as local authorities jump on the outsourcing, shared services and offshore boom.

The "location" decision will become more challenging due to shifting political and threat profiles.
The major Private Equity firms will again review acquisition and rationalization of the large outsourced provider market. The fact that no deals were done in 2006 does not mean they have lost interest.

Outsourcing of procurement will gain momentum in 2007 as certain providers begin to achieve true scale and market share as others continue to challenge them. The business case will become the velocity case.

Indian providers will continue to grow their global presence and win even more complex deals. The challenge will be to move from their high margin man-time "voice" pricing to true outsourcing price structures.
Throughout next year, the thriving U.S. providers begin to fall into one of two groups:

“The Transformers" -- Those that offer transformational outsourcing as a result of taking on multiple process silos, thereby gaining enough mass to affect change.

“OAP providers" -- Those who focus on single functional areas, often within a single vertical market, and offer outsourcing as a product (OAP).

Shared services centers, where clients choose to outsource to a center owned by the company, will continue to represent as much as half of the offshoring activities with Indian providers starting to participate more and more, creating hybrid solutions eventually poised for outsourcing. U.S.-based outsourcers will lag in adopting this solution area.

Knowledge Process Outsourcing (KPO) will grow significantly over next 3 years and generally go to captive centers, or be outsourced as a part of hybrid transactions. Research and Engineering will grow significantly as an offshored service.

"Future trends are easy to identify if you know what indicators really make a difference," says Trowbridge. "You have to know how to read between the lines when it comes to revenue numbers released by outsourcing providers. While an interesting statistic, forecasts must be evaluated based on labor statistics, birth rates, economic indicators and hard-to-find, internal corporate activities not released to the general public."

Trowbridge says his company gathers data from a variety of sources, including customers, providers, government agencies, research firms and trade and business media from around the world for the use of helping clients make informed decisions.


About Ben Trowbridge


Best known as a thought leader in the evolution of Outsourcing, Ben Trowbridge is a proven leader with more than 20 years of diversified global experience as Managing Partner, CEO and Senior Executive with proven experience in hundreds of outsourcing, shared services and offshore transactions as a consultant and buyer executive. In acknowledgment of his achievements Ben has been nominated for various Innovations in Outsourcing awards and is a recognized leader in all areas of IT and BPO sourcing and relationship management.

He has created a number of new, and now proven, sourcing models to include the Sourcing Alignment System (SAS)(TM), JVsourcing(TM) Methodology, FastSource(TM) and the Market Reality Assessment (MRA).

He has led and supervised sourcing transactions ranging from $150 million to $2.2 billion for a variety of activities such as F&A, HR and IT across multiple industries to include: transportation, consumer products, telecommunication, manufacturing, retail, technology, entertainment and energy/utility industries.

Ben previously served as Managing Partner and as a Founder of Ernst & Young's Outsourcing Services Business, which was sold, as part of one of the largest consulting services sale to Capgemini for $10.5B Euros in 2000. Prior to Ernst & Young, Ben served in a variety of executive roles at EDS during a number of high growth years. Prior to his civilian career Ben served in the U.S. Marine Corps attaining the rank of Captain.

11/07/2007

The next wave of globalisation: Offshoring R&D to India and China

Entrepreneur-turned-academic Vivek Wadhwa is up front about his use of offshoring and importing foreign talent in a previous professional life as founder and CEO of two technology companies. "I was one of the first to outsource software development to Russia in the early '90s. I was one of the first to use H-1B visas to bring workers to the U.S.A.," Wadhwa says. "Why did I do that? Because it was cheaper."

That tactic is even more lucrative for corporations today, says Wadhwa: "When you have a person on H-1B waiting for a green card, you have them captive for six to 10 years."

Wadhwa, who was addressing an audience at Harvard University, where he is now a Wertheim Fellow at Harvard Law School's Labor and Worklife Program , says outsourcing work to lower-cost countries and importing temporary foreign workers is all part of a larger globalisation transformation that is happening "an order of magnitude faster than the industrial revolution." According to Wadhwa, the ramifications of globalisation will be much greater than the industrial revolution. "It will impact our standard of living here in the U.S. in the next five to 10 years."

For better or worse? That depends on whom you ask, says Wadhwa. And it may be beside the point. "Globalisation is the reality," Wadhwa says. "Whether you like it or not, it's happening."

It's no longer just "low-end" work like call centre positions or data entry or even midlevel programming that's being shipped to China and India. High-value research and development work also is moving offshore, says Pete Engardio, a BusinessWeek senior editor who has been writing about globalisation for 20 years in addition to being a Harvard Law School Wertheim Fellow. And while cost is still the major driver, it's also about where talent and capabilities are available - and where they are available in mass.

Challenging conventional wisdom about engineering talent, Visa arguments

In fact, globalisation is happening so fast, academics like Wadhwa (also an executive in residence at Duke University's Pratt School of Engineering can't keep pace. Inspired by his students, Wadhwa decided to fill the void with some research of his own.

"I had four or five students come up to me one week and ask, 'What courses can we take that will make us outsourcing-proof?'" says Wadhwa. "These students were paying megabucks to study there and should be very well sought after and yet they were worried about their jobs. That didn't make sense to me." He and his students began to explore what he describes as commonly accepted misinformation about graduation rates around the globe and the "skills shortage" forcing U.S. companies to go abroad.

According to the U.S. Department of Education, America matriculates 70,000 students with undergraduate degrees in engineering every year, versus 350,000 produced by India and 600,000 produced by China. But China's numbers, which Wadhwa calls "propaganda," include "short cycle" degrees and rely on a looser definition of engineering. "The Chinese government told the provinces they had to produce more engineering degrees," Wadhwa says, "and the provinces gave them what they wanted."

India's numbers also include two-year diplomas. As a result, India and China can promote themselves as engineering-degree machines but "the vast majority of the graduates are unemployable," he says. (Wadhwa is currently getting a mix of cheers and jeers for his BusinessWeek.com column from Oct. 26, "The Science Education Myth", in which he cites an Urban Institute study that claims that U.S. schools are turning out more capable science and engineering graduates than the job market can support.)

As for the talent crunch argument that Bill Gates and others employ when lobbying for more foreign worker visas, Wadhwa also pushes back. He and his students surveyed 78 leaders at U.S. companies that were outsourcing high-tech work. The majority said they had trouble finding qualified candidates in the U.S. However those same respondents recorded job acceptance rates of greater than 60 percent, with those rates either remaining constant or increasing, and time to fill an open position of four months or less.

There's a shortage all right, says Wadhwa, but it's "a shortage of engineers below market price that work day and night like slave labour."

When asked about issues like the productivity and quality of Indian and Chinese employees versus their American counterparts, there was little debate among respondents to Wadhwa's survey. Eight-seven percent said U.S. workers were as productive as or more so than Indian or Chinese workers, and 96 percent said that their U.S. locations produced equal or higher quality work than their centres in China and India.

The advantage with U.S. workers, according to survey respondents, included communication skills, understanding of U.S. industry, business acumen, education and proximity. Chinese workers were valued for their low labour cost and willingness to work long hours, while Indian workers were sought after for their low labour cost, work ethic, English skills and technical knowledge.

The view from India, where R&D is rising

In spite of the survey respondents' praise of American workers, the offshoring of engineering and IT work to China and India continues for a variety of reasons, including the availability and cost of labour, and its proximity to new product markets.

BusinessWeek's Engardio described for the audience what he saw on his latest trips to Asia. Bangalore, the capital of India's IT industry, is home to Motorola's R&D lab, where employees designed 40 percent of the value of company's latest RAZR models.

Next door at NXP (a company spun off from Philips Semiconductors), workers are designing the chip sets for high definition televisions. General Electric's campus, called the Jack Welch Technology Center, features lovely low-slung buildings, first-class gyms and food courts-and much of GE's product design work. Ten percent of GE's Indian researchers are working on products the company plans to introduce in the next six months, 70 percent are working on products to be released in three to five years and 20 percent are doing very early stage work on products that won't be released for more than a decade.

"When I talk to economists or I read a lot of the public discussion of outsourcing, they still draw a lot of distinctions between what's being done 'here' and what's being done 'there,'" says Engardio. "They'll say the high-end stuff is done here (in the U.S.). The low-end, repetitive stuff is done 'there.'" That's not true, says Engardio. GE and Motorola aren't just employing coders or call center workers abroad, "they're employing scientists."

North of Bangalore, Hyderabad has a booming biotech industrial zone, says Engardio, that stretches for miles, housing 37 contract research organisations. "Three years ago, you could not get a major pharmaceutical company to say they would shift R&D to India," Engardio says. "Today they're doing it. Big pharma is gearing up big time."

The same day Wadhwa and Engardio conducted their seminar at Harvard, General Motors announced its plans to build an advanced research centre in Shanghai to develop hybrid and other leading-edge car technologies. "There are great quantitative and qualitative leaps in what is being doing in Asia," Engardio says.

And it's not just massive multinational corporations setting up R&D shops in Asia. Top-tier Indian IT service providers, once known for pure software development, are going after R&D business too, says Engardio. Satyam has set up a huge, industrial engineering facility. HCL Technologies is doing avionics work for Boeing's 787 Dreamliner. Tata Consultancy Services actually designed a forklift for a U.S. company that was getting by its Japanese competitor and wanted to drastically reduce costs, says Engardio.

How is all this high-end work getting done if the vast majority of engineering undergraduates in India are indeed "unemployable" out of school and India produces fewer than 1,000 PhDs a year (compared to nearly 8,000 in the U.S.)?

For one thing, says Wadhwa, the multinationals and third-party contractors are more than happy to train local graduates who may not be ready to hit the ground running. Some have set up their own six-month "finishing schools" to do just that. The problem with post-graduate degree production in India is proving to be no barrier, says Wadhwa, because many of the researchers and scientists currently working there were educated in the U.S.

Due to the difficulty of obtaining work visas or green cards in the United States, these workers have sought greener pastures in India, China and elsewhere, he says.

For its part, China is actually working on improving its educational system the way it improved its manufacturing processes over the last two decades, according to Wadhwa. But India doesn't have to produce its own post-graduate degrees, says Engardio. "We're talking about chemists and molecular biologists with master's degrees or PhDs coming from U.S. to India where it's not doom and gloom," Engardio says. "There's a lot of opportunity."

While R&D goes offshore, innovation stays. For now.

When you're talking about offshoring, Engardio says, the conversation is no longer just about costs. It's also about where talent and capabilities are available. Though cost-cutting remains the driver behind offshoring, Engardio says this work won't come back to the U.S. as India's wages or other costs rise. "The shift is permanent," Engardio says.

In other words, American workers may be terrific. But they're expensive. And there aren't enough of them, according to Engardio. If the U.S. held on to more of the foreign-born students awarded advanced degrees, there might not be as many of them available in India or China either, according to Wadhwa.

One of the drivers of this R&D shift overseas is the rise of virtual prototyping. That ability to design and test machines on a computer has made design work more mobile. And engineers trained in the necessary software are plentiful in India. That's good, says Engardio, because these companies need "lots and lots of engineers."

Also integral to the shift of product R&D offshore is the focus on embedded software. Fifty percent of the value in new cars, for example, is in the dashboard, Engardio says. "There's a tremendous need for engineering and software expertise," he says, "and the Indian IT services companies like Wipro and Tata have that. They are now the biggest industrial design companies in the world."

The dynamic turns R&D offshoring into a slightly different numbers game. "If you want to keep up and have to introduce this kind of innovation and the myriad services you need to offer, it would be very difficult to do in the U.S. just due to workforce capacity issues," Engardio says.

Then there's the other reason R&D is increasingly headquartered in India and China: proximity to emerging markets.

Cisco now has 2,000 people doing R&D in India. "The head of that centre sits in an office and looks like a modern day Pharaoh with the scale of building under way around him," says Engardio. "He says in five years, they will have 10,000 people. And by the way, I'm not looking for average engineers. I want innovators. These are no cheap bodies." Why? He's not looking at the U.S. as his major market for product sales. He's looking at emerging technology greenfields markets like Dubai in the United Arab Emirates and Saudi Arabia.

"All the new developments outfitted with next generation telecom networks we'll never see in the U.S.," says Engardio. "The next generation of services is going to be in Asia." So Cisco is situating the design work in India. "Is it going to work out?" asks Engardio. "Who knows? But it seems like the right bet."

Anything that a company's customer touches and feels will remain harder to offshore to India, China or anywhere else, says Engardio. And perhaps, most important, so too the innovation itself. The product ideas happen at headquarters and are executed elsewhere.

"The only thing (India) isn't doing is owning the intellectual property. The multinationals are pulling the strings and staying at the top of the food chain, which is why the debate over whether this is good or bad for the United States is very, very murky," says Engardio, "The American companies have India working for us, in a way."


11/06/2007

2008 FAO Forecast

The FAO market is in for a wild ride next year. Here is a list of changes that are occurring at mach speed:

The Suppliers:

  1. FAO outsourcing will cleave in two. The Indian suppliers will dominate version A: transaction-based outsourcing. Version B: FAO with business insight. David Poole, Vice President and Deputy Chief Executive of Global Business Process Outsourcing, Capgemini, says this version focuses less on taking out cost and more about improving the value of the business through more efficient processes. He says the traditional providers and some of the Indian players will move up the value chain to participate in Version B.

    Rich deMoll, Global Managing Director, BPO, HP, sees a bigger separation between the Tier-1 suppliers and the other tiers. "2008 is going to distinguish the Tier-1 players from the rest of the pack," he says.

  2. There will be more supplier consolidation. Poole, head of NA BPO, predicts large suppliers will acquire niche players who have the needed specialization skills or software as a service (SaaS) players who have the desired applications. "The goal is to broaden their scope of services," says the Capgemini executive. The Everest Research Institute says "captives, technology providers, and niche suppliers will be the prime acquisition targets in 2008."

  3. Buyers want suppliers who specialize. Suppliers that can add value to a buyer's top line have to specialize in verticals since many of them have unique challenges. Financial services companies have different concerns than energy suppliers, for example. Martin Cook, GSO, Outsourcing, Capgemini, says vertical specialization "will emerge as a key differentiator for Tier-1 suppliers."

    The need for specialization will enforce the sector's continuing consolidation, continues Cook. "Suppliers will augment their solution portfolio through acquisitions," he says. He points to Capgemini's purchase of Kanbay as an example of this trend.

  4. Suppliers will increasingly target the higher end of mid-market buyers, companies with annual revenue ranging US$2-5 billion points out Katrina Menzigian, Vice President for FAO, Everest Research Institute. "These buyers are actively exploring FAO options and present a large market potential," she says.

  5. Suppliers will evolve their delivery models, especially in the area of platform-based technology solutions, in order to create viable business cases for serving this segment of the market. Menzigian predicts 2008 will see increased market discourse on the viability and appeal of platform-based FAO solutions. "The drive towards building FAO platforms will further fuel merger and acquisition activities as suppliers build out their capabilities," she says.

    Gianni Giacomelli, Head of BPO Strategy and Marketing at SAP, points out that many suppliers, irrespective of what segment they are in, are already starting to change the way they deliver services. He says they are increasing automation to reduce their dependency on "now often exhausted" labor arbitrage.

  6. The Buyers:

  7. CFOs will worry more about how outsourcing can grow their businesses. Poole says buyers now tell him they want to grow their businesses three percent a year instead of asking him to take out one percent of cost. He says the new focus will make outsourcing more valuable; however, suppliers still need to take out cost because the savings fund the business transformation.

    Giacomelli adds that innovation is the key for business growth, and labor arbitrage alone does not get buyers there. Reengineering processes and related systems will, and buyers are waking up to this.

  8. Buyers are divesting themselves of brick-and-mortar assets like shared services centers. DeMoll says they are trying to sell them to outsourcing suppliers, especially in India, or private equity partners. Another option: keeping them but having them service government entities.

  9. Buyers will focus on sustainability. DeMoll says next year labor arbitrage will just be the entry price. Buyers want more than just cost savings; the HP executive says buyers want to change their business model. Suppliers will have to demonstrate they can sustain the business case for outsourcing.

    Anoop Sagoo, Accenture, agrees. "We're seeing a distinct shift in focus to a more sophisticated value proposition focusing more on business outcomes," he reports.

    "Buyers definitely want to build on their initial cost-savings-centric engagements to drive additional savings and enhanced business performance," adds Menzigian. However, she says "it's not clear the extent to which buyers are willing to trade their customized solutions for platform-based solutions which could potentially deliver the additional functionality and performance they desire in a cost-effective manner." The buyers will start to work out this conundrum next year.

    Giacomelli says this shift will "emphasize seamless process integration across towers." Their focus will be on designing processes and systems to do so. However, the SAP exec points out "suppliers will still need economies of scale to be sustainable and will continue pushing some level of standardization around their own best practices."

  10. The Deals:

  11. Mature FAO buyers are beginning to seek out more integrated solutions for key process areas such as Order-to-Cash (O2C) and Procure-to-Pay (P2P), observes Menzigian. She says the goal is "to target a larger cost base, while also driving greater business performance through pre-integrated solutions designed to provide increased visibility and effectiveness across the end-to-end process."

  12. Big-Bang deals will be fewer. Menzigian predicts the market will see a rise in the number of deals that surgically target opportunities to drive value in terms of both operational and strategic gains. O2C/P2P serve as an example.

  13. Current FAO buyers will move up the value chain. "Buyers are asking us, 'What else can you do for me?'" DeMoll reports. New services that build sustainability include analytics for decision modeling and data mining. "Buyers who have gotten past the transactional savings now want an analytic platform with tools and brain power in a low-cost environment," DeMoll reports.

    Sagoo says FAO is becoming more complex. Buyers now want to outsource more complex aspects of the FAO process than in previous years. He points out Accenture is managing the information around BT's profitability data. "A few years ago people would have laughed at the possibility. Today, buyers want to outsource to get high-performance finance."

    Or they want to cover multiple geographies. For example, Accenture's FAO engagement with Microsoft includes 92 geographies. The Everest Research Institute predicts suppliers will diversify their location portfolio next year. Good choices: Tier-2 Indian cities, Eastern European locales, Mexico, China, and the Philippines. Next year the FAO market "moves towards a truly global sourcing model," says its 2008 Forecast report.

  14. Buyers will want bundled solutions that include finance and accounting. Sagoo says buyers are realizing finance and accounting is really just the back end of a bigger process. "We're seeing buyers looking across processes," he says. The most obvious combos are procurement and HR.

  15. To get more value from transaction services, suppliers are using more electronic flow through. Cook says buyers who have already realized significant savings through labor arbitrage now look to automation to achieve greater savings. DeMoll adds buyers and suppliers will share the gains as improved way of doing things provides more business value, like improving business metrics like day sales outstanding.

  16. The Influencers:

  17. Cook says process innovation and business insight will begin to replace labor arbitrage as the key drivers for FAO. They require a mix of onshore/offshore delivery to deliver higher level value, he explains.

  18. Buyers will start to look at the integration of process change with technology change. DeMoll says in the past when buyers wanted to change a process from end-to-end, the suppliers bumped up against the internal IT department. HP solved the problem by bundling the two; "we deliver process change as a service," he explains.

  19. The FAO value proposition will expand beyond outsourcing. Sagoo says some buyers want to partner with their FAO supplier "to create a go-to-market portion of the deal. Buyers are beginning to think out of the box," he says.

  20. Buyers will create a number of internal shared services, which they will turn into captives or transition to BPO. "The momentum is building for hybrid service delivery, which will prompt a lot of rethinking of how to deliver such services. People who understand both the business and technology side of things will be in high demand," says Giacomelli. This will encourage BPO providers to look for help in the software vendors and will expose those software vendors who are not able to proactively help.

  21. The Market:

  22. FAO will continue to grow in 2008. DeMoll says HP is seeing "increased demand. This was the busiest summer I've had in my outsourcing career," he says.

    One reason: FAO has a proven track record. "This reinforces the model and encourages more companies to try it. Success is driving the increased demand," he adds. Fear of hard times in 2008 is helping, too; cost containment pressures are building. And many are trying to take advantage of the global business model, he continues. Another driver: The Everest Research Institute reports US$600 million of FAO contracts are up for renewal in 2008.

  23. Human capital management is a key contributor to the continued growth of the FAO market. "As in-house departments continue to struggle to hire and retain qualified finance and accounting professionals and IT departments continue with similar challenges, the value proposition offered by experienced FAO suppliers gains in appeal," says Menzigian.

ITO Forecasts for 2008

Cost is still "a major factor" in IT outsourcing. But, according to Sergey Karas, Vice President, Global Strategy at Luxoft, Russia's largest ITO service provider, "globalness is the main driver today, along with access to skills not available in house."

The size of ITO contracts continues to be smaller because of multi-sourcing. Karas predicts that by 2008 multi-sourcing even among offshoring deals will be mainstream such that buyers will pass over providers offering delivery from only one country.

Pat Adamiak, Vice President Portfolio Marketing and Alliances, Outsourcing Services, HP, says the main trend in ITO today is "a lot of pressure from customers to deliver a lot more innovative ways to do ITO." He cites two examples. Today, most data centers are still architected on a deal-by-deal basis. "But in the future, there will be a world-class center based around blades, world-class architecture, etc., which will allow transfer of data center deals to move faster."

Desktop services are another example. Today, the desktop is very multi-tower and cobbled together. "In 2008, we will see a much more integrated desktop offering. It will focus categories more on end-user perspectives and needs instead of today's desktop, with categories that are by process," she says. For example, the desktop of 2008 will be more advanced for mobile people, along with the categories for standard needs. The desktop needs of a clerical person or call center person are different from a road warrior.

Another reaction to client demand is that 2008 will also bring a move toward automating how service providers deliver services, Adamiak states. This will bring a lot of provider consolidation to allow more leverage. HP purchased Mercury and Opsware this year to have a stronger software services arm. IBM made several similar acquisitions in 2007. "Combining automation with the trend of local delivery makes it easier to move to a sophisticated global delivery and move services around," he says.

Market Growth

According to Everest Research Institute, the overall IT Outsourcing (ITO) market will continue on a steady mature growth. Everest's analysis shows that ITO penetrates the Fortune 100 by about 80 percent already. Ross Tisnovsky, Vice President, Research (ITO), says this penetration suggests that most of the ITO activity in 2008 will be happening in the mid-size (e.g., Fortune 1000) client segment.

"We are also likely to see further decline in mega-deals, both in terms of number and the size," Tisnovsky predicts. "As fewer mega-deals get announced, most of the play in the mega-deal segment will shift to renewals and re-competes. These trends are likely to intensify competition resulting in additional pricing pressure across ITO."

Although the small and medium business (SMB) segment remains largely under-penetrated in terms of ITO, Everest Research Institute does not predict major changes and efforts coming in this market segment. Everest expects it to remain under-leveraged, due to the issues of low-scale of outsourced processes and the provider's high cost of the sale. "Both are hard to overcome in the SMB market," Tisnovsky explains.

Infrastructure

Infrastructure outsourcing (IO) will continue growing at a sustained pace in line with the rest of the IT industry. "Under the calm surface of the market, we will see significant share shifts as the Remote Infrastructure Management Outsourcing (RIMO) model continues gaining market share, growing at 60 to 70 percent," Tisnovsky predicts. As RIMO gains share, the traditional model of IO will start to show a declining trend around 2010.

Tisnovsky advises buyers looking to make decisions in the next two to five years to investigate whether RIMO is good or bad for them. "Some will find that RIMO is not cost-effective for them. Others will want to get rid of assets, and RIMO won't work in that case."

A shift toward asset-light deals in both RIMO and traditional models will result in revenue deflation as assets start getting excluded from the scope of IO engagements. "We estimate that the asset-light deals are usually 60 to 70 percent smaller than the corresponding asset-heavy deal. Thus, the shift toward the asset-light deals is likely to result in improved margins, but will affect the top-line growth, says Tisnovsky.

He adds that aggressive adoption of labor arbitrage by both RIMO and traditional providers is also likely to add to the pricing pressure in the IO industry.

Karas of Luxoft predicts that the strong adoption of ITO in European companies in 2007 will continue in 2008, with companies actively seeking services delivered by a nearshore, Eastern European provider. But not all locations--nearshore or offshore--are equal, and value depends on expertise as well as other cost factors.

He points out Eastern Europe is not a good location for application maintenance, for example, because it requires more expensive skill sets. China is great, he says, for low-complexity, large projects where communication and time zone differences are not critical (as they are in application maintenance). In application development, where project specs and architecture may not be very clear, the location of the development team is critical because interactions need to take place in real time.

"New regions, such as Russia and Ukraine are now included in Gartner's "leaders" tier; this allows companies to fight for sending work to providers in these regions. Outsourcing to a service provider in a non-mainstream region still sometimes raises eyebrows because of common stereotypes and perceived risks," says Karas.

But he predicts that labor arbitrage will inevitably go away as the market becomes more efficient and hourly rates for certain skills become the same.

Application Development and Maintenance

According to Everest Research Institute, demand for ADM services is likely to continue slowing down, resulting in a more sustainable pace of growth of about seven percent (down from its 12 percent growth in the last couple of years).

"We estimate that the penetration of offshoring into the ADM headcount of IT services companies is approaching about 40 percent and is likely to start showing signs of saturation," says Tisnovsky. Most buyers are already comfortable with their current ratio of offshore work.

This maturation of the offshore trend will result in a shift of value in ADM from labor arbitrage into more complex areas of ADM (e.g., process improvement and application portfolio rationalization). Tisnovsky predicts this value shift will result in buyers' driving consolidation of their service provider portfolios and push toward more partnership-based relationships.

Luxoft's Karas says software performance and product testing has recently made its way into the outsourcing arena. He says in 2008 the scope will broaden beyond traditional functional and system integration testing to also encompass overall system performance and scalability, usability, and security, thus bringing higher value to the client organization. This will require suppliers to offer new outsourcing services in the market in the areas of system performance engineering, test automation, and regression testing efficiency.

Karas says, "Providers providing ground-up software product development and engineering support for client offerings will pick up steam in 2008 as transformational and innovative outsourcing grows, especially in the automotive, industrial, electronics, and telecommunications equipment industries."

He predicts that Agile, which started taking root in the development community and in outsourcing engagements during 2007, will see greater adoption in 2008, as a strong tool in helping to speed time to market. "It will be critical to have a provider that has mastered Agile," Karas states.

He also points to a trend of major multinationals selecting providers other than the large Indian players "when there are a lot of parameters around the criticality--such as mission-critical applications, and real-time transactional systems." Deutsche Bank, for instance, chose Luxoft over large Indian players for its global CRM application. "Some companies feel they will have more leverage, more control, and more escalation power with a mid-size provider," Karas says. "Deutsche Bank communicates directly with our senior executives, and that level of relationship takes on a tremendous role in achieving value."

"The economy is changing pace and it's a global world, so competition is tighter and companies need to replace their applications with minimum risk," states Keras. He predicts companies in 2008 will "do even bolder moves with outsourcing and it will become more like an ecosystem."

He notes another trend: verticalization. Karas predicts it will become an important provider-selection criteria. "Service providers with certain domain expertise that can speak the language of the business, think and talk like the client, and thus react more quickly will easily differentiate themselves from other providers," he explains.

ITO in Health Care

Siemens has noticed a trend of fewer large outsourcing deals in the healthcare industry. Further, the provider notes that most deals are shrinking from longer historical contract term lengths to five to seven years now. While both of these trends can signal a strategy toward best-of-breed multi-sourcing deals, Jim Way, Vice President Managed Services Operations, Siemens Medical Solutions, says they signal a different phenomenon in healthcare outsourcing.

"Potential clients are saying to us, 'Come in and do a good job on our pain points; and if you do well, we'll give you more work,'" says Way. He explains this demand arises from two areas. First, many healthcare organizations are still dipping their toes in the waters of outsourcing.

Second, more and more CIOs are now involved in the outsourcing decision, not just the CEO and COO, and fewer CIOs are losing their jobs to an outsourcing provider. "This frees them to consider using outsourcing solution instead of a threat to their jobs," says Way.

Still, the CIOs currently have a comfort level with doing only pain-point deals. The main pain points areas today are: (1) help desk, (2) application support (legacy systems, implementing and supporting new systems, and (3) the one-time project of improving the network infrastructure (enabling implementing new advanced systems).

Way notes that the clinical concentration for systems now is not financial. It's implementing new systems, transitioning from old systems, and also outsourcing the help desk. He adds that "at Siemens, we're changing the way we support some services, such as the help desk, because more and more incoming calls are from physicians and clinicians who don't have time to troubleshoot anything."

Finally, the Siemens executive says, "Our potential customers are now demanding 'What are you going to do to help my business?' and 'How can IT enable what we want to do?'"

Buyers and providers, more than ever, need to remember that relationship management is critical for outsourcing success, he warns. "It's the key to ensuring a satisfied client and extending the contract."

Lessons from Outsourcing Journal:

  • Cost is still a major factor in IT outsourcing, but globalness is the main driver today, along with access to skills not available in house.
  • By 2008, multi-sourcing even among offshoring deals will be mainstream such that buyers will pass over providers offering delivery from only one country.
  • 2008 will see a much more integrated desktop offering. It will focus categories more on end-user perspectives (such as mobile workers) and needs instead of today's desktop, with categories that are by process.
  • ITO penetrates the Fortune 100 by about 80 percent already. This penetration suggests that most of the ITO activity in 2008 will be happening in the mid-size (e.g., Fortune 1000) client segment.
  • Although the small and medium business (SMB) segment remains largely under-penetrated in terms of ITO, this market segment is expected to remain under-leveraged, due to the issues of low-scale of outsourced processes and the provider's high cost of the sale.
  • The remote Infrastructure Management Outsourcing (RIMO) model continues gaining market share, growing at 60 to 70 percent. As RIMO gains share, the traditional model of IO will start to show declining trend around 2010.
  • A shift toward asset-light deals in both RIMO and traditional models will result in revenue deflation as assets start getting excluded from the scope of IO engagements. Asset-light deals are usually 60 to 70 percent smaller than the corresponding asset-heavy deal.
  • The strong adoption of ITO in European companies in 2007 will continue in 2008, with companies actively seeking services delivered by a nearshore Eastern European provider.
  • For ADM, major multinationals are selecting providers other than the large Indian players when there are a lot of parameters around the criticality--such as mission-critical applications and real-time transactional systems.
  • Agile, which started taking root in the development community and in outsourcing engagements during 2007, will see greater adoption in 2008, as a strong tool in helping to speed time to market. It will be critical to have a provider that has mastered Agile.
  • Verticalization is another ITO trend and will soon become an important provider-selection criteria. Service providers with certain domain expertise that can speak the language of the business, think and talk like the client, and thus react more quickly will easily differentiate themselves from other providers.
  • In health care outsourcing, more and more CIOs are now involved in the outsourcing decision, not just the CEO and COO, and fewer CIOs are losing their jobs to an outsourcing provider. This frees them to consider using outsourcing solution instead of a threat to their jobs.
  • Health care CIOs currently have a comfort level with doing only pain-point deals. The main pain point areas in health care today are: (1) help desk, (2) application support (legacy systems, implementing and supporting new systems, and (3) the one-time project of improving the network infrastructure (enabling implementing new advanced systems).