Outsourcing bonanza '06: trends you need to know about

In the outsourcing world, 2006 was a year of change and acceptance. Change in that China and other countries are starting to take some business away from perennial offshoring giant, India, and acceptance in that it's no longer taboo in most circles to talk about outsourcing plans in public. In other words, for better or worse it has become a part of corporate culture. For this report we take a look at some of the driving forces in the outsourcing realm this year. Certainly some of these issues will continue to loom large in 2007 such as H1-B levels, China's rise and outsourced security concerns.

Security problemsThe marriage of security and outsourcing is always a problem, especially if the contract involves offshoring work. This year outsourcing giant, India, took steps to ensure offshored work was secure. The country's National Association of Software and Services Companies set up a watchdog organisation that it says will monitor data security and privacy practices in the country's IT services, call center and business process outsourcing industries. The initiatives were taken in the wake of allegations in the United States and United Kingdom that Indian call centre workers have stolen and sold data processed by Indian outsourcing companies. The issue of security isn't limited to India. Earlier this year, a Government Accountability Office study said US government agencies that use outsourced information services firms for everything from law enforcement to counterterrorism data-gathering do not protect the privacy of the citizen data they use.

China's riseWith everyone from IBM to Unisys directing billions of dollars its way, China certainly got a lion share of investment this year from some of the largest outsourcing players in the world. And even India's outsourcing giants -- Tata, Infosys and WiPro -- have a growing presence in the country. To back that up, a study released by Analysys International earlier this year said China's software outsourcing services market reached $US323 million in the first quarter of 2006, up almost 44 per cent compared with the first quarter of 2005. Still security concerns dog the country's industry fledgling business.

India's growthCan anything slow the offshoring/outsourcing machine that is India? It doesn't seem likely. Despite any inroads China may be making, India's outsourcing numbers keep getting larger. The country's software and services voice, National Association of Software and Service Companies says the country's BPO services will grow 35 per cent - 40 per cent in fiscal year 2007 to achieve between $US8 billion and 8.5 billion vs. $6.3 billion in the previous fiscal year. According to Nasscom estimates, the total revenue for the entire IT sector, domestic and exports, by the end of the current fiscal is estimated to be about $36 billion to $38 billion. And this month Infosys will become the first Indian company to be included in Nasdaq's prestigious list of top-100 companies.

India's turmoilEverything isn't rosy in the 'Truth Alone Triumphs' country however. India isn't immune to the violence and turmoil that exists in the rest of the world. Some of its internal strife spilled into the outsourcing arena this year with bombings, a strike and online threats. Not to mention the ongoing staff shortage. When you're No. 1 the target on your back is a lot bigger.

BlundersWhether or not it's a company's decision to bring work back in-house or a contractual failure, the dumping of an outsourcing contract is never very pretty. A Deloitte study last year said nearly 75 per cent of the 25 large companies surveyed have had negative experiences with their mega-outsourcing projects. It's a wonder more don't flame out.

H-1B visa trialsThe year began with promises that the H1-B levels would be raised by the year-end. But that push got lost in the politics of Washington, DC. The Democratic congress will likely take it up again early next year but most experts agree its scale could be significantly reduced.

Small business outsourcingPerhaps it's a natural outgrowth of the industry's larger outsourcing trend but this year SMB seemed to take a harder look at outsourcing as a way to run their companies. It's a huge opportunity for outsourcers as these small firms begin to recognize that they can achieve the same benefits that large organisations enjoy when they hand over non-core IT functions to outside service providers.

"There is a small but growing legion of SMBs that are considering outsourcing," a research director at Gartner, Robert Brown, said. He notes that the base is small: Companies with 100-499 employees now account for just 7.8 per cent of the $50.5 billion business-process outsourcing market, but that number is expected to grow to more than 8 per cent of a $78.8 billion market by 2009, according to Gartner. Other experts say the growth of specialized service providers including ISPs and local managed service providers for desktop management and other IT functions. These include offerings from the large outsourcers including service desks, desktop management and specialized network offerings. Examples include EDS Agile, HP SMB Services and IBM Express Advantage.

Managed servicesPerhaps epitomised by IBM's Global Services business, managed services have grown by leaps and bounds this year, a market segment that will be worth more than $US630 billion by the end of 2006. But experts say as these services grow users need to be ever-more diligent about contracts and what they expect from their vendors.

China and India set for another banner year

Asia's two rising stars, China and India, will continue to shine in the IT market next year, with GDP growth expected to hit 8.3 percent and 7.7 percent, respectively, predicts IDC.

In a statement released today which outlines key predictions for the new year, the research house projected that China will maintain its position as the largest IT market in the Asia-Pacific region, excluding Japan--making up 32 percent of the region's IT spending. The Chinese market will be trailed closely by India at 23 percent, IDC said. Both countries are expected to account for the lion's share of the region's IT spending at more than 43 percent.

According to IDC, information and communications technology (ICT) spending and growth for the Asia-Pacific region will be largely driven by "continued economic growth and increasing market demand across the region".

In addition, the IT market in this part of the world will grow at 10 percent over 2006 to reach US$132 billion next year, IDC projected.

Eva Au, managing director at IDC Asia-Pacific, said in the statement "The region's astounding rates of economic and IT market growth have resulted in dynamic and rapidly evolving corporate and consumer markets. This is a role the region has gradually accepted, but the growth is now taking off explosively."

While the major economies are expected to continue to deliver strong results, IDC believes that both China and India will begin "a more serious look internally, focusing on bridging urban-rural divides and developing infrastructure".

"As economic growth rates cool slightly, [China and India] will be pushed to look at domestic markets as recent years of prosperity drive IT infrastructure build-out and the closing of domestic urban-rural gaps" the research company said.

As such, Au noted, vendors will need to have specific knowledge of domestic markets in order for them to successfully compete.

BPO: relationship matters
IDC is also projecting a new model in business process outsourcing (BPO), focusing on vendor-customer relationship to emerge in the coming year.

Companies in Asia planning to outsource their business processes are likely to "test drive" short-term pilot projects first, before taking the plunge into a long-term commitment, IDC said. This will ensure that the vendor is sufficiently capable of meeting the needs of the customers, the analyst noted.

This business model contrasts with the structure typically used to "serve Western clients, who are more willing to transit to BPO based on compelling economics", IDC said.

The researcher also predicted that 75 percent of midsize and large companies in the Asia-Pacific region will plunge into early-stage service oriented architecture (SOA) adoption in 2006, completing the first phases of their projects in 2008.

However, IDC advised organizations to address SOA deployments with caution in terms of internal process assessments and re-engineering--an area in which, vendors and systems integrators could find new business opportunities, it said.

Data Centers: Consolidate or Outsource?

Outsourcing applications also makes sense in cases where you need to quickly fill gaps in your existing applications, in which case you need to make sure the provider can easily integrate with your back-office systems. It can also be an effective way to release I.T. staff from noncore resource intensive functions.

Datacenter consolidation is the mega-solution for bringing I.T. costs, management, and disaster recovery under control, but depending on a company's goals and size, outsourcing can also play a useful complementary role.

"Outsourcing should definitely be part of the decision process," says Michael Bell, research vice president at Gartner. "Once you make the decision to consolidate or relocate, it then becomes a question of whether you should build a new datacenter, buy one, lease one, or outsource it."

There are several outsourcing alternatives: You can collocate your own equipment and applications at a third-party hosting facility and manage it all with your own staff; contract with a complete managed service that provides the equipment, applications, and management staff; or outsource the entire business process, including servers, applications, and bodies to a BPO (business process outsourcing) provider.

Keep in mind, however, that if cost is the main priority, outsourcing is frequently not the answer. "When you're talking about 2,000 or 3,000 square feet or less, collocation makes sense as you get the benefits of scale economics, including the large datacenter and the shared UPS systems and generators," Bell says. "Once you get into the 5,000-to-10,000-square-foot range, it becomes a push as to whether hosting can really compete with doing it yourself. Third-party hosting can often be 30, 40, or 50 percent higher."

Joe Drouin, CIO and vice president of TRW Automotive, agrees. "When we started the consolidation process we assumed we would outsource, so we put out an RFP and had a few vendors come back to us with quotes. It turned out that even if we took the best offer it would be roughly 20 to 30 percent more than doing it all in house."

But if time and agility are the main drivers, outsourcing can make a lot of sense. For example, a department that needs to get up and running fast on a new application may find that I.T. has other priorities and can't devote the necessary resources to move quickly. In that case, contracting with a software service provider can reduce the time to get up and running from months to weeks.

Outsourcing applications also makes sense in cases where you need to quickly fill gaps in your existing applications, in which case you need to make sure the provider can easily integrate with your back-office systems. It can also be an effective way to release I.T. staff from noncore resource intensive functions, such as messaging , so that they can concentrate on more strategic initiatives.

Take outsourcing a step higher and BPO can be the quickest way to completely automate and transform a nonessential or even core business process to bring it up to speed and retain your competitive edge. It's also a fast solution for a spin-off or new organization that lacks a human resources department, for example, and needs one fast. It's all a question of priorities.

Report: India, China most popular

The world's two most populous countries--China and India--were named the most popular outsourcing destinations by companies in Asia, according to a recent study KPMG.

Results of the report, titled Asian outsourcing: the next wave, were released last week and revealed that India and China emerged as the top two most popular destinations by many companies in the region which outsource their business processes. India earned top ranking at 55 percent, followed by China at 36 percent.

At 20 percent, Singapore takes third placing in the survey, which covered a total of 305 senior executives from companies in the Asia-Pacific region. About 43 percent of respondents were based in Singapore, Hong Kong, Malaysia, Japan, Australia and New Zealand. Just under 50 percent of participants were based in India and China.

Singapore was closely trailed by Hong Kong at 16 percent, far ahead of fourth-placed Philippines, at 7 percent, which has been traditionally regarded as a lower cost alternative to India.

Lim Yen Suan, Singapore-based director of risk advisory services at KPMG, said: "While not the lowest priced, Singapore offers strong intellectual property protection, a well-educated talent pool, and overall a more secure and stable pro-business environment."

"This translates to a higher value," Lim said.

Contrary to conventional wisdom which suggests companies that outsource typically come from higher-cost and labor-short places such as Australia, Japan, Hong Kong and Singapore, companies based in China and India--where labor and operational costs are low--are also outsourcing, the KPMG report said.

The survey found that 55 percent of Indian companies currently outsource their business processes, with another 33 percent planning to do so in the next three years.

Lim said: "Companies in Singapore should learn from the Indian experience by focusing their own resources in areas that are business critical, and outsourcing non-core activities elsewhere.

"If done right, [this would] allow a company to focus on its core competencies while accessing skills that are lacking in-house," she said.

Next outsourcing wave
According to the KPMG report, the next wave of business process outsourcing (BPO) will grow far greater than it is now and will "catch up with the levels of IT outsourcing".

"[BPO] will be increasingly pervasive as companies in Asia become more comfortable with entrusting some finance, accounting and human resources functions to outsiders," Lim explained.

Key criteria for companies selecting service providers include language support, as well as country or organizational culture, the report noted.

The survey found that companies in the region outsource a diversity of functions, including IT solutions (54 percent of all respondents), accounting, debt collection and tax processing (35 percent), data collection and report writing (26 percent), human resources (22 percent) and supply chain management (19 percent).

Meanwhile, companies in India are "far more open to outsourcing all kinds of business functions" compared to their peers from the rest of the region, according to the study.

Edge Zarrella, KPMG's global partner in-charge of information risk management noted that "outsourcing is gaining steam and companies with no plans to outsource may soon find themselves at a competitive disadvantage".

However, the report said that even though outsourcing is on the rise, there were certain areas where respondents indicated no plans for outsourcing, including strategic planning, sales and marketing.

Another area that can never be outsourced is accountability, the consulting firm said.

According to Zarrella, "outsourcing business processes doesn't mean [companies] can outsource risk", adding that "in-house executives now, more than ever, need to take responsibility for setting policy, direction and strategy and for seeing that [these are] executed correctly".

The report also predicted that "an explosion in demand may occur if companies start to outsource strategic services such as research and development, engineering and risk management, to remain competitive".

Chengdu looks to working with Singapore to capture global outsourcing market

Chengdu is looking to working with Singapore to capture a larger portion of the lucrative global outsourcing market.

The Chengdu-government backed software services provider TifoSoft Services opened its Singapore representative office on Tuesday.

TifoSoft says the office will serve as a launch pad for collaborations with Singapore companies to jointly explore opportunities in the United States and Europe.

According to an IDC research, IT outsourcing in China is estimated to grow at an annualised rate of nearly 40 percent between 2004 and 2009 - making it the fastest growing sector in the IT services market.

And with global business process outsourcing, or BPO, for offshore contractors estimated to be worth about US$24 billion, TIFOSoft sees great opportunities for growth.

It hopes to combine China's strong IT expertise at competitive cost with the Singapore branding to grow globally.

"We think if we want to expand our business in Europe and US, we need to be here and cooperate with the local companies," says Jade Zhang, Vice Chairman, TifoSoft Services.

Stephen Lim, chairman of Singapore infocomm Technology Federation says: "While we both compete, there are also a lot of space for us to collaborate as well, and that collaboration can improve both sides in terms of our global competitiveness.

"It may be seeking the correct partner in the short term. In the long term, I think it will upgrade both our industries significantly."