In 2006, leading adopters of outsourcing are pursuing BPO (Business Process Outsourcing), which eclipsed ITO (IT Outsourcing) in the second quarter TPI Index in terms of contract value. All speakers described their experiences in terms of progressing from simpler, more discrete activities to more complex, integrated processes. Transformation is increasingly an actionable business objective in outsourcing strategy, but the context was consistently transformation of the business process, not transformation of the enterprise itself.

According to IDC analysts Brian Bingham and Barry Rubenstein, cost is still the major driver for outsourcing, but it is diminishing in importance, as both enterprises (buyers) and outsourcing providers gain experience and develop best practices. In IT, for example, gaining access to employees on demand is a growing strategic consideration. In several categories—ERP was cited by several presenters—companies cannot find and train workers quickly enough to meet volatile market demands, and they are realizing that competence in outsourcing enables them to mobilize resources quickly as needs emerge. As providers mature their processes and offerings, they can offer "drop in place" solutions such as Sarbanes-Oxley and other compliance services. In addition, the ITO provider market is very much in flux: on one hand, it has consolidated, with the top five providers owning 50% of market revenue. However, market leaders are losing share, and offshore challengers are making inroads. The top offshore deal this year, Tata Consulting Services' deal with Pearl Group, was worth $847 million.

Gary Schneider, Managing Director at neoIT and Bob Ferrari, Program Director at Manufacturing Insights, both mentioned global "centers of excellence" that are increasingly being tapped by enterprises from around the world in the emerging "services globalization" wave. It is truly evolving into a global market for buyers and sellers of highly sophisticated services. As specialists in helping enterprises to develop global portfolio outsourcing strategies, neoIT proposes that they fully leverage the increasingly diverse, high-value provider market. Gary cited several centers of excellence: multilingual call centers in Costa Rica, Hungary and Argentina, as well as IT and software talent in India and Eastern Europe. China is very strong in manufacturing and getting stronger. Particular challenges are intellectual property protection, which is quite reasonable in some places and difficult to enforce in others. Also, labor mobility is high in hot markets like Bangalore.

"Outsourcing Enabling U.S. Companies to Survive and Thrive"—Case Studies

Several corporate executives who had led bet-the-company outsourcing initiatives explained how outsourcing had played a key role in making their companies more competitive.

• Marcia MacLeod, Vice President of BPO at The Williams Companies, described how outsourcing enabled the company to survive a severe crisis during the early 2000s. The Williams Companies is a Fortune 200 company that distributes 12% of the natural gas in the U.S. Notably, they pioneered the idea of using pipeline right of ways to lay fiber and build the new telecom infrastructure that was driving the Internet boom. In the early 2000s, Williams' stock, which had traded at $48 during the boom, bottomed out at $0.78. The company was slammed simultaneously by the telecoms depression and the Enron debacle, which tainted most energy company stocks. However, the company acted decisively, exiting several businesses and shrinking from 24,000 employees to 3,700. Working with IBM, they rapidly concluded several simultaneous BPM agreements in which they turned over human resources, much of finance and accounting and IT to IBM, who hired many of Williams' employees. MacLeod firmly stated that the company could not have made the transition without their partnership with IBM, their need for speed and results was so great.
• Steve Hosley, Senior Vice President of Shared Services and Assistant Controller, AOL, shared a similar, although somewhat less dramatic account. AOL was an early Internet darling that has since been coping with the maturing market for consumer content. In August 2006, AOL announced a major strategic shift, and the company began offering free service to its subscribers. It is shifting its revenue model primarily to advertising. In the 1990s, AOL built shared services centers around the world, and it was partnering with Hewlett-Packard in ITO. Hosley explained how they subsequently layered BPO services on top of the IT services and focused on global delivery. The company's subscriber model was proving to be no longer viable, and it had to get far more efficient and professional with its processes. Notably, it acquires "Internet properties" regularly, and their business processes are usually ad-hoc and not scalable. Hosley explained how their employees are shifting away from a "transaction mentality" to "transformation" of business processes, which are subsequently transferred to outsourcing partners. In other words, their value is in reengineering processes, not operating them. In his opinion, providers have significantly enhanced their capabilities in recent years, and he feels increasingly comfortable with F&A (finance & accounting) deals.
• Vasant Bennett, President of Barry-Wehmiller International Resources (BWIR), related a fascinating story about outsourcing-enabled strategy and transformation. Barry-Wehmiller is coming to specialize in partnering with and acquiring specialist manufacturers that are in difficulty, and he cited Paper Converting Machine Company (PCMC) as an example. Many of these manufacturers are blindsided by emerging global competitors and new customer expectations, and they struggle to compete and downsize. The problem, however, is a strategic shift in demand and high commodity prices. Customers expect far more innovation and shorter life cycles. BWIR turns these companies around by offshoring select low-level processes that enable the companies to innovate faster and operate more efficiently, which enables them to increase hiring after many years of layoffs.
• Quentin Tse, Managing Director, Indirect Strategic Sourcing at Lucent, recounted outsourcing's vital role in Lucent's "Journey of Hope" through the telecoms bust in 2001-2003. Similar to Williams Companies, Lucent needed to drastically reinvent itself to survive, and it went from 130,000 employees in 2001 to 30,000 this year. They have pursued BPO extensively, and their relationship with Ariba is strategic because they track transactions and renegotiate supplier agreements based on the data. They have shifted employees' focus to exclusively high-value, core activities, and outsourcing partners operate ancillary processes. Today, due to their success with outsourcing, they are far more agile and responsive to market shifts. They have shifted fixed costs to variable costs en masse through outsourcing.

Trends in Manufacturing and Energy

The IDC Forum Midwest featured industry tracks in manufacturing and utilities. Bob Ferrari of Manufacturing Insights commented that vertical specialization was a key trend for outsourcing providers servicing manufacturers. There are two value poles: cost cutters and business transformation advisors. Manufacturers are squeezed by customers who need to respond to volatile demand changes with unprecedented quickness, and they need to cut costs constantly. They also need to tap emerging markets. Many manufacturers have managed global supply chains for years, so they are quick to embrace outsourcing services. They are pressured by constantly escalating costs in their commodity inputs. Due to competition, they cannot simply pass on these costs to customers.

There are three key drivers that are driving outsourcing trends among public utilities. Karen Blackmore, Program Director of Energy Retail Strategies at Energy Insights, emphasized the importance to changes in regulatory policy in Europe and the U.S. Europe is pushing for deregulation and competition. The U.S. Energy Policy Act is effecting many aspects of the energy industry since it incentivizes conservation, environmental behaviors and more frequent metering. It is also driving increased mergers and acquisitions. Many utilities are faced with aging workforces, and they see outsourcing as a way to assure their access to workers.

Drivers of Innovation

Several speakers and attendees observed that innovation will increasingly be a driver for outsourcing, and Bill Metz, Global Business Services & IT External Business Development Manager at Procter & Gamble, epitomized the trend. Like AOL, Bill highly recommended shared services as a way to prepare for outsourcing. P&G pursued shared services aggressively in the 1990s through its creation of P&G Global Business Services. GBS came to specialize in bundling services, offering "a working PC" to P&G rather than hardware, software and network services, and this was a key element of their success. One of Bill's roles is to offer or sell P&G process and service innovations, which have been developed to serve the corporation, to external customers. In addition, a large portion of P&G's new product ideas come from outside the company, and this trend is increasing. Bill also advised attendees on how to use governance to enhance the value of outsourcing relationships.

Alfred Binsford, Vice President at Unisys, offered some excellent examples of how outsourcing is transforming their clients. For instance, Washington Mutual made the surprising decision to outsource their check clearing operations. Keep in mind that check clearing has traditionally been a core bank offering and value proposition. However, WaMu found that outsourcing provider Unisys could increase the level of service and operate the process more efficiently, so they did it to improve customer service. In other words, WaMu realizes that they are in the customer experience business, not check clearing. In another case, Nordstrom outsources numerous IT functions that enable it to focus on improving the customer experience. For example, they manage customer experience based explicitly on the customer's lifetime value to Nordstrom. To whit, customers have individualized return policies. According to Binsford, all companies need to "variable-ize." Another example with which attendees were too familiar was the airline industry, which exports its inefficiency to customers, who spend an inordinate amount of time waiting in airports because they lack information to make decisions: if they make the stand-by, that drives decisions about how they use their time at the airport. "It's all about the delivery of relevant information," Binsford concluded.

One of the most intriguing trends to emerge from The Forum: how enterprises' growing competence with outsourcing will impact the mergers & acquisitions market. Many speakers cited situations in which they had used outsourcing to accelerate time to value after mergers or acquisitions: outsourcing human resources or IT of merger partners can significantly facilitate integration, and the process can subsequently be brought back in house if desired. Quentin Tse of Lucent, acknowledged the link, which is directly relevant to the current negotiations between Lucent and Alcatel, but he couldn't comment, citing merger negotiations.

Gary Schneider of neoIT believes that the link will be a growing market. In his experience, the impact of outsourcing on M&A value realization is so great that outsourcing advisors should be brought in to help structure the deal. The current practice is to involve outsourcing advisors as a part of post-merger integration, which leaves money on the table.

Wrap-up

Outsourcing is serving as a catalyst to making global organizations much more collaborative, open and interdependent. Forum attendees clearly reflected a relatively rapid progression up the value curve in terms of process complexity. Moreover, outsourcing is clearly contributing to increased employment in the U.S. despite its reputation for layoffs in the near term. Several speakers credited their use of the practice with saving their companies from extinction. Moreover, the term "outsourcing" is rapidly becoming outdated because the trend is clearly global sourcing, in which enterprises employ a "best of breed" approach to procuring services wherever competencies emerge. Innovation will become the focus of sourcing and collaboration.

Invitation to join our mailing list

This is an executive summary of several reports forthcoming during the next two weeks. We invite you to sign up to be notified as they are released. The reports will feature:

• IDC analysts' analysis and predictions of ITO and BPO
• In-depth treatment of case studies
• Preview of the Global Sourcing Adoption Curve and transformation predictions
• Trends in marketing and customer experience