HICAGO, April 4 /PRNewswire/ -- The ways in which companies evaluate outsourcing performance, the global strategies of outsourcing providers, and even presidential politics will be affected by emerging trends in the outsourcing industry, according to Diamond Management & Technology Consultants, Inc. (NASDAQ: DTPI) .
In advance of its annual Global Outsourcing Study, experts in Diamond's Strategic Sourcing Advisory practice offered a forecast of trends that are altering the way corporate clients approach their sourcing decisions and how providers of outsourcing services must adapt to a changing market. Buyers and providers of outsourcing services are invited to participate in Diamond's 2007 Global Outsourcing Study and share their confidential opinions about the current and future state of IT and Business Process outsourcing. The survey is available online at http://www.diamondconsultants.com/.
Buyers trying new ways of improving outsourcing effectiveness
Diamond's 2006 IT Outsourcing Study found that forty-seven percent of buyers had experienced an abnormal contract termination in the past year while only two percent stated that their outsourcing expectations were exceeded.
"Optimizing outsourcing effectiveness is becoming a high priority for C- level executives," said Tom Weakland, who leads Diamond's Strategic Sourcing Advisory practice. "We are going to see companies scramble to find advisors who not only have the skills to review contractual agreements, but who also are willing to provide hands-on management of offshore resources at remote locations, and who can design and track meaningful measures of provider performance."
Weakland points to Cisco's December 2006 appointment of a new executive position, the Chief Globalization Officer, as a sign of things to come as companies dedicate more staff on a full-time basis to lead and manage sourcing and global expansion initiatives.
Charlie Gavin, a Partner in Diamond's Sourcing practice, adds, "Clients are placing more emphasis on improving their day-to-day vendor management capabilities along several dimensions -- knowledge management and market understanding, contract/performance management, and relationship management. Some buyers are even sending employees to their providers' offshore training centers for extended periods of time to establish tighter partnerships and better working relationships."
Buyers will quietly re-insource work
As buyers continue to be disappointed in some of their outsourcing results and re-assess their activities, more companies will quietly bring some outsourced work back in-house even as they continue to invest in other areas on an outsourced basis.
"In some cases, internal IT employees will be asked to shift gears and retake ownership of functions that they previously helped transition to an outsourcer," said Brian Tumpowsky, a senior member of Diamond's Sourcing practice. "We think the trend we've seen in past studies, where companies are outsourcing commodity activities to redirect IT staff toward more strategic work, will continue. But internal IT departments will also be re-tasked with functions that had previously been outsourced. It's a balancing act; companies are trying to calibrate their sourcing portfolios to achieve the optimal mix of resources."
This is by no means the death knell for outsourcing as Diamond sees continued growth for both IT and Business Process outsourcing. Buyers of the future, however, will be more prone to re-insource when their expectations are not consistently met.
Negative publicity about outsourcing will re-emerge with the run up to the 2008 U.S. Presidential election
With Democrats taking majority control in Congress and presidential campaigning well underway, the topic of outsourcing and its impact on U.S. jobs will once again become a significant campaign issue. Offshore outsourcing providers experienced a slow down of growth amongst a wave of backlash in conjunction with the 2004 presidential election, and the potential is there for a similar occurrence in 2007 and 2008. Even though outsourcing has become a mainstream activity and organizations are better prepared to handle employee backlash and public outcry, Diamond believes that many organizations may begin to delay major outsourcing decisions as the election nears.
More buyers will look to outsourcing as a growth play.
The announcement by Wipro and Motorola last summer of a joint venture to host a global network operation center is representative of a movement in the market for buyers and providers to establish what Weakland calls "cooperative captives."
"Look for companies trying to enter India or China to form joint ventures with outsourcing companies. It's a way to leverage established relationships with the government and associate with an established local brand," Weakland said. "These joint ventures can jump-start business efforts and bring tax advantages, and can also accelerate market presence by reducing the navigational hurdles of setting up a business overseas.
They can accelerate a company's efforts on the revenue side in local markets as well. More U.S. and European-based companies recognize the potential of changing consumer demographics among the 1.1 billion citizens in India and 1.3 billion in China. India already hosts a middle-class population of 300-400 million while China's middle class is expected to grow from 130 million to approximately 600 million (twice the size of today's U.S. population) in the next 15 years. And so accordingly U.S. and European firms will craft outsourcing strategies not only to leverage additional capabilities and cost savings, but also to become exposed to these growing markets in terms of knowledge, brand, suppliers, and eventually customers.
Rates will rise as second-tier providers invest in additional global
operations to balance their onshore and offshore presence
As large multinational offshore players battle for global outsourcing supremacy, balancing the need for low-cost operations with customer demands for more high-touch service will alter provider global delivery models and cause them to readjust their rate structures. Second-tier providers will be forced to follow the lead of the larger firms and increase investments to expand their global reach and get closer to their customers. As a result, providers will seek to increase their prices to offset their expansion costs.
"As costs rise, sourcing implementation and management become even more critical, particularly if the goal is cost-savings," said Weakland. "More companies will try to bring structured management discipline to their outsourcing relationships. The risk is they will end up negotiating adversarial relationships and we'll see even more abnormal contract terminations."
China will leverage the 2008 Beijing Olympics to increase its status among
outsourcing destinations
Expecting more than 20,000 journalists, China will take advantage of the 2008 Summer Olympics to promote its position as an outsourcing super-power, highlighting its increased focus on English education, a booming economy, and a growing pool of highly qualified software engineers.
"According to Diamond's annual global IT outsourcing studies, the number of buyers that expect to outsource IT functions to China has soared 48 percent between 2004 and 2006," Weakland said. "The Olympics are the perfect platform for Chinese outsourcers to begin to convert those expectations into real market share, and establish their reputations as capable, high-quality providers."
While China is poised to capture significant mindshare, Diamond believes it will still be several years before the Chinese outsourcing industry captures significant market share.
Greater demands for outsourcing employee security checks
After a multinational bank discovered in 2005 that call center employees at an Indian outsourcing firm had stolen more than $300,000 from its customers' accounts NASSCOM established a National Skills Registry of employees working at Indian outsourcing firms. However, the latest estimates are that only 30 percent of the industry's employees have undergone independent background checks and been added to the database.
"Customers are anxious to verify the qualifications and backgrounds of specific employees," said Gavin. "Outsourcers have done a good job in the areas of physical and information security but this is the year they need to focus on their employee base. We'll see outsourcers carefully screening employees, verifying work histories and backgrounds, and using the issue of employee screening as a competitive edge."
About Diamond
Diamond (NASDAQ: DTPI) is a management and technology consulting firm. Recognizing that information and technology shape market dynamics, Diamond's small teams of experts work across functional and organizational boundaries to improve growth and profitability. Since the greatest value in a strategy, and its highest risk, resides in its implementation, Diamond also provides proven execution capabilities. We deliver three critical elements to every project: fact-based objectivity, spirited collaboration, and sustainable results. To learn more visit http://www.diamondconsultants.com/.
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