Customers are no longer focusing on bringing services backin house but are focusing on optimizing vendor relationships and improvingoperational flexibility. Historically, increases in market consumption ofoutsourced services have been driven predominately by new customer expansionfor mature functions like Information Technology, Human Resources, Finance andAccounting, and Procurement.
Beyond 2014, the outsourcing market is projectedto grow by several key dimensions including functions, services, and locations.In addition to enable innovations, companies are also looking at diversifyingtheir service delivery footprint by considering locations that have areputation for high service quality and lower cultural barriers. In the earlyyears of outsourcing, companies would turn over key management responsibilitiesas part of their outsourcing transition without making the ongoing investmentsin vendor and service management. To make the leap from low cost and high-qualityservice delivery; to innovative and proactive business partnership, vendors andcompanies will need to meet in the middle.
Beyond 2014, collaborativerelationships between vendors and companies will help drive service quality.In a perfect world, all of the changes occurring in theoutsourcing landscape would result in tangible value creation for end customersand improved profitability for both the companies and service provider. Potentialchanges to the regulatory landscape including data privacy legislation in theEuropean Union, as well as, pending immigration legislation in the UnitedStates may hinder business economics and increase outsourcing related risks. Keytrends in outsourcing To understand the dynamics of the outsourcing market,Deloitte surveyed 140 companies in nearly 30 different countries, on specificdimensions representing changes affecting the outsourcing industry.
Thesecategories included: regulation and legislation, functions and services,geography, and innovation and technology. Based on the results of thequestionnaire, the following key trends emerged: Technology: Recentdevelopments and innovations, like cloud computing and business process as aservice, are driving growth within the outsourcing space while innovations likegamification and ‘Bring Your Own Device’ are having less influence onoutsourcing decisions. Over the past decade, new markets for outsourcingopportunities have emerged in Romania, Mexico, and Brazil, and these areexpected to see continued growth.
If legislation is enacted to curb offshoring,respondents believe they may face an increase in costs, which they intend topass through to consumers. In Europe, the Middle East and Africa, relaxation ofemployment related regulation is expected to lead to an increase in outsourcing,while increased data privacy regulation is likely to reduce the use ofoutsourcing globally.The last two decades have seen a significant rise inoffshoring to external service providers.
The driver for this trend has beenlargely economic, since offshoring often offers more competitive price pointsfor the same service levels. In recent years we have witnessed a small butgrowing reversal of this trend where companies that have previously offshoredfunctions are bringing them back to their home country. Based on the results ofthe 2014 Survey, a significant majority of respondents have not and do not planto move work from offshore locations back to their domicile country locations.The coupling of traditional outsourcing with cloud-basedofferings has both advanced and complicated the latest, cutting-edge datacenter deals.
Both are required components to encompass the end-to-end scope ofservices. Historically, this has been achieved through traditional outsourcingalone, but we are seeing increased pockets of cloud products embedded in datacenter scope, with the vendor’s solution providing economies of scale byleveraging virtualized servers on standardized architectures, technologies, andinterfaces. The result is a lower infrastructure cost to the company and theflexibility for companies to cease running their own data centers. According torespondents, end user engagement innovations and hardware flexibilityinnovations are not expected to lead to an increase in outsourcing in theforeseeable future. Given the nascent nature of these innovations, manyrespondents are unable to predict what influence they will have on futureoutsourcing decisions.
India has been traditionally the preferred choice for manyoffshoring and outsourcing activities. Even though high labor costs, highwithholding tax, currency volatility and inflation in Latin America areinhibitors for outsourcing as compared to established outsourcing destinationslike India and China; other factors like proximity and time-zone make LatinAmerica an attractive option for offshoring. Latin American governmentscontinue to support free trade and promote various English language supportprograms to attract global service providers and companies alike.
The Financeand Accounting Outsourcing market in Latin America emerged from the earliersuccess of captive/ shared-service center pioneers in the region and nowthird-party outsourcing providers are increasing their presence in the region. Themarket is currently driven by intra-region outsourcing demand; however, asglobal FAO providers scale up their presence in the region, Latin America issoon expected to become one of the major hubs for FAO. While this region isflush with opportunities, firms looking to outsource to Latin American shouldproceed with caution, as countries like Brazil, although ripe with opportunity,are also subject to variable tax structures.
While emerging markets with low laborcosts locations receive considerable attention, established offshore,near-shore, and even onshore locations still provide compelling opportunitiesto support business. Outsourcing location decisions today are driven by notjust labor-cost arbitrage opportunities, but critical operating factors, riskappetite, and corporate growth strategy.Of the regulations surveyed, increased data privacyregulation is projected to have the greatest impact on the outsourcingdecisions. U.S. organizations are three times more likely to decrease, ratherthan increase, outsourcing due to an increase in data privacy regulation. EMEAorganizations are almost twice as likely to decrease, rather than increase,outsourcing. Organizations outside of the U.
S. are three times more likely toincrease, rather than decrease, outsourcing, due to relaxation of hiring andtermination restrictions. In the U.S., health care reform is expected to resultin a moderate increase of outsourcing. Relaxation of immigration policy willresult in a moderate increase in outsourcing, driven primarily by the AsiaPacific region with 45% of participants indicating they are likely to increaseuse of outsourcing versus 28% across all geographies combined. Less than 5% oforganizations are likely to decrease outsourcing because of a relaxation inimmigration policy. Relaxation of export controls will result in a moderateincrease in outsourcing activity, driven primarily by the Asia Pacific regionwith 45% of participants indicating that they are likely to increase use ofoutsourcing versus 24% across all geographies combined.
Less than 10% oforganizations are likely to decrease outsourcing as a result of relaxed exportcontrols.As capabilities and offerings of third-party providersbecome more sophisticated, the management of outsourced and out-tasked servicesbecomes more complicated and risky. Corporations should make Vendor Managementas an integral part of their business strategy. Key trends in Vendor ManagementVendor Management: The market is currently under-invested in the area of vendormanagement, particularly when it comes to tools, methods, and processes.
Despitethe lack of investment, companies generally believe that their vendormanagement capabilities are equal to or better than their peers. These trendsclearly articulate that a lot of the underinvestment in vendor management, maybe a direct result of a general market consensus that each company is equal toor better off than their peers, regardless of whether or not they assign anyadditional resources to improve their vendor management process maturity. Issueand Dispute Management: In addition, to evaluating performance, companies areexpanding their capabilities in terms of managing and resolving issues ordisputes.
Where historically, companies were fairly quick to terminate a vendorcontract or drastically reduce vendor services, they are now pursuing a seriesor preliminary options before terminating contract.Historically companies have extended onshore sourcing andprocurement functions to include a Vendor Management capability. Withincreasing demand for outsourcing and offshoring and growing complexity, VendorManagement functions have evolved and established their own identity. Just ascompanies have evaluated benefits for outsourcing IT and non IT services, inaddition to realizing cost benefits, the same approach can be applied to VendorManagement. According to the survey respondents, Financial, Commercial andContract Management capabilities are perceived to be above average in terms ofquality and maturity. Other processes including Governance, ServicePerformance, Issue and Dispute Management, and Transition Management require additionalimprovement. Vendor Management organizations continue to be most effective attraditional Vendor Management , however few organizations rate themselves aboveaverage in Multi-Service Provider Integration and Supplier Risk Management.During the early stages of outsourcing, vendor performancewas measured predominately through quantitative measures, e.
g. service levels;however, companies are now beginning to further expand performance managementprograms by evaluating providers based on a variety of different measurementsincluding end-to-end business outcomes and results. According to surveyrespondents, most issues are derived from the service provider being reactiverather than proactive or from the provider delivering poor service despiteachieving service levels. Cost related metrics and culture compatibility areleast commonly cited as the cause of service provider related issues.Once an issue has been identified with a service provider,companies may pursue several alternative strategies to address and remediatethe issue before it escalates to a dispute.The secondary option for the companyis to ‘Manage to the Contract’, often a more contentious approach, requiringthem to leverage contractual mechanisms, rights and obligations to resolve theissue.
As a tertiary option, companies may choose to resolve the issue throughconclusive actions like terminating the contract in part or in its entirety.In spite of the structural and cultural changes influencingoutsourcing decisions, the market appears to demanding more outsourcing. InformationTechnology continues to be the most commonly outsourced function, at nearly 60%penetration. This growth is redefining what traditionally outsourced tasks werewithin each function, e.
g. from transactional to increasingly complex workbased on judgment.30% of respondents expect to outsource additional servicesacross all areas of F, with the least historically outsourced services,Accounts Receivable and Billing, seeing a planned increase above the 30% mark. Currentlymany activities are basic transactional finance and accounting processes suchas accounts payable, however companies are starting to experiment withoutsourcing non-transactional financial functions like financial analysis. Outsourcingknowledge-based financial services is still a nascent business practice, but asthe comfort level of organizations rise it should become a more commonpractice.Corporate legal departments are faced with a number ofissues that require them to evaluate and implement Legal Process Outsourcingsolutions. The solutions offered by outsourcing Legal services have led to arise in tactical Legal services such as e-Discovery, Billing, and Research andAnalysis.
As the LPO market becomes more mature, corporate legal departmentsare starting to move outsourcing beyond transactionbased legal processes tojudgment based processes, such as Contract Drafting which is expected to growby 18%..While RE services like Design and Construction andDocument Services are reaching saturated levels of a mature market, there arestill significant opportunities for growth. Of all RE services polled,Asset and Lease Management is the greatest area of expected growth. While only13% of the respondents currently outsource Asset and Lease Management Services;37% of those who plan to outsource, are considering doing the same.
The transformation continues to seek equilibrium, shiftingto a center that includes value-added and judgment-based services. Call CenterManagement is a commonly outsourced service in Human Resources and is usuallyaligned with administration for specific services such as benefitsadministration. Integration services such as reporting are becoming moreprevalent and are expected to undergo high growth.
Results of the 2013 Global Contact Center survey showed 85%of organizations currently support multichannel customer service capabilitiesand over 90% of organizations that view customer experience as a competitivedifferentiator provide multi-channel customer access. With one of the highestexpected growth rates in Customer Service, Simple “Tier 1” CustomerService Inquiries is the most commonly outsourced service. Due to theimportance of the customer experience, Complex “Tier 2” CustomerService Inquiries are less commonly outsourced and are seeing some of thelowest growth rates among customer service outsourcing.The adoption of procurement outsourcing has been very slow. Inmany cases, procurement outsourcing is restricted to the transactional procureto pay processes as an extension of the F BPO deals. Rewards forbreaching procurement outsourcing barriers are high; savings for non-corecommodities and services procured though BPO services could range between 5% tomore than 20%.7 As a result, there has been a significant uptick in theoutsourcing of indirect procurement activities, including transactionalprocessing and sourcing of goods and services.
First on the list of commonlyoutsourced processes in Procurement is Create and Issue Purchase Orders,followed by Spend Analysis and External Benchmarking, then CreatingRequisitions, and Assessing Supply Markets. Traditionally the least commonlyoutsourced Procurement processes and services are Supplier Negotiation andContracting as well as the Management and Assessment of Suppliers; however,despite the current limited outsourcing activity in Procurement space, 30% ofrespondents have indicated that then plan to outsource Supplier PerformanceManagement and Assessment and 23% of respondents plan to outsource SupplierNegotiation and Contracting.IT is typically the single largest administrative cost forcompanies. Though the demand for ITO continues to grow, there are significantshifts within the IT services delivery model driven by recent advances intechnology which offer companies and providers new and creative solutionoptions. Companies demand more value than can be derived from economies ofscale and labor arbitrage alone.
Over the past few years, leading companieshave moved away from “Mega deals”; instances where large organizationssole-sourced significant chunks of their IT service delivery environment to asingle provider through long term deals.