Outsourcing Tsunami: Global economic drivers will accelerate the pace of change

The tsunami of sourcing has only just begun, says outsourcing industry visionary Ben Trowbridge, CEO of outsourcing advisory firm Alsbridge. In his 2008 predictions released this week, Trowbridge believes landslide economic drivers will continue the global redistribution of labor to its natural location and push offshoring and outsourcing to new heights. The speed of this move will be driven by continued high energy costs, the restriction of capital access driven by the sub prime meltdown and low unemployment in technology and accounting.

These forces will drive providers and buyers to evaluate more clearly their options based on the emerging economic facts of 2008. Trowbridge says outsourcing providers and buyers will make strategic decisions in 2008 based on how their business is affected by the sub prime market, oil price increases, offshore wage inflation and the falling value of the U.S. dollar.

“Even though the last few years have seen a strong economy, outsourcing has continued to be a major strategic driver for the top 1000 U.S. companies,” says Trowbridge. “The slowing and changing direction of the economy has caused the boardroom to evaluate yet again steps to control costs and an even greater interest in outsourcing to offshore locations.

Trowbridge predicts the following outsourcing trends for 2008:

Currency issues will plague the entire outsourcing community, lengthening sales cycles and increasing legal debate about price increases. This will drive the need for expanded benchmarking to define the real issues. The weakening dollar will drive companies to evaluate regions that are closer or that have fewer fluctuations in their currency against the dollar. The uniformed that rely on Google facts will worry about labor cost inflation not understanding the true issue.

Access to capital driven by the distress in the sub prime mortgage industry will continue to ripple through business, driving a need to reduce SG&A and improve financial performance.

Outsourcing will increase dramatically in the mid-market which will cause the outsourcing providers to re-think their cost of sale.

The U.S. Government will outsource more functions to onshore providers. The dilemma will be how much the government is prepared to allow moving offshore given base political pressure.

The leading offshore providers will increase their U.S. workforce as a result of the stronger rupee, adding more sales and marketing functions.

The offshore providers will continue to be taken more seriously in complex “up the value chain” projects and services.

US providers will struggle with innovation due to the pressures of their low-margin contracts. The India-based providers will struggle but also improve their position as innovators.

US based outsourcing providers will still continue to be hesitant to address their high-cost, back-office functions. This blindness will leave them vulnerable to a host of outside forces including hostile acquisition and the toxic effect of low-margin and low-growth sales.

Human resource outsourcing will continue to be evaluated and outsourced by clients. The providers will wallow in low-margin, overly complex contracts with low client satisfaction levels. The need for the value-added HRO innovator will continue to grow.

Finance and accounting will continue to be evaluated and in many cases outsourced. Providers will have relatively high levels of satisfaction. More transaction pricing for F&A services will emerge.

ITO will grow and be redefined this year with a growing split in value-based contracts and low priced, resource-based contracts. Project management and client confidence in the ability to deliver will drive the decision.

The tipping point for the legacy U.S. based outsourcing firms may be near. If they increase their profitability a few mover points with current low share prices, they could become attractive to acquisition by an India based provider. Up until now, the US based providers have not been attractive acquisition targets as they would be dilutive to their shareholders. Watch TCS and Infosys this year. Private equity will again make a move. While the ACS deal did not happen, look for others to come calling.

Tier Two Indian companies, including Patni, WNS, Genpact, HCL and ICICI will have a terrific year, moving faster than their larger competitors and grasping first mover advantages in new outsourcing spaces, including engineering, legal and marketing.

Companies will choose to locate into new countries after careful evaluation. The list of proven, sustainable and accepted locales for outsourcing will grow with Mexico, Vietnam and Bulgaria among others making new headway.

Indian tier two cities will become more attractive

Contrary to other reports offshore will have net growth again in 2008 driven by Shared services, where companies operate the offshore center themselves. This strategy will continue to be the hidden offshore driver, representing as much as half of all offshore positions generated in 2008.
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.

“Uncertain economics should make 2008 an aggressive year for outsourcing and offshoring,” says Trowbridge. “Those that implement the right strategic moves will benefit from not only competitive costs, but innovation and market leadership as a result of collaborating with the strongest outsourcing providers.”

About Ben Trowbridge

Best known as a thought leader in the evolution of outsourcing, Ben Trowbridge has more than 20 years of diversified global experience. As a senior consultant, buyer and provider executive, he has led hundreds of outsourcing, shared services and offshore 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. Additionally, he has developed a number of successful sourcing models to include the Sourcing Alignment System (SAS), JVsourcing Methodology, FastSource and the Market Reality Assessment (MRA). 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

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.