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Global trends '09: Imperatives for globalisation

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CIOL Bureau
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MUMBAI, INIDIA: Year 2008 was an unprecedented year in the recent business history.

We saw businesses and national economies undergo severe pain and are still not completely out of it, with most economists predicting a slow start to 2009 as well. As businesses world over grapple with challenges and market changes, they would focus on making their operations efficient, and strengthen their businesses.

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Here are some of the changes and trends that would shape the services' globalisation decision making during the year.

Kevin Parikh, CEO and senior partner, Avasant, says: “Businesses are expected to tighten their spend and will take a close look at the annual IT budgets. These are expected to be atleast 10 percent lower, in view of macro economic situation. However, business will resort to enhancing the percentage of spend on outsourcing, in order to derive maximum bang from every dollar spent”.

Pradeep Mukherji, president & managing director, Avasant Asia, says: “Though 2009 will pose to be a challenging year, it will throw up new opportunities for service providers in the outsourcing industry. It is upto the organization to have in place the right strategies to reap the benefit of these opportunities”.

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The Avasant “Think Tank” believes the following business; technology and sourcing trends will play a significant part in shaping the global outsourcing business in the coming year.

1) Business Trends

a) Increasing Government Role in Commercial Sector

2008 has been a tumultuous year for businesses across the globe. It all began with the meltdown in the mortgage sector in US, which soon spread to other industries and geographies.

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As we move into 2009, economic downturn has severely impacted the automotive sector, with other sectors including construction, energy and retail also facing serious challenges. The US government has initiated economic bailout packages and various other stimulus strategies, which have been mimicked by other governments.

As a result, it is expected that the governments would play an increasingly important regulatory role, in the functioning of the corporate entities.

IT and Business Process Outsourcing (BPO) industry will feel the impact, if the government starts to mandate or heavily influence domestic job retention as strings attached to bailout / stimulus economic incentives.

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Having said that, governments will have a challenging time managing these new initiatives along with their current portfolio of services. We expect the governments will hire external firms to become the "de-facto" (outsourced) managers of some of these new programs.

b) Business Transformation

As companies undergo fundamental transformation, they will present significant opportunities for the service providers. Coming out of the slowdown, industries would go for significant overhaul with new regulations, business models and opportunities. With the wide-spread consolidation amongst the financial services companies, it would provide vendors opportunities in M&A rationalisation.

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Clients would look at re-negotiating existing contracts and would look at pricing rebates from service providers – increasing the woes of providers. New business models will evolve faster like shared risk/shared benefits option, to help generate savings to reinvest.

Companies would find it increasingly difficult to internally sell transformational initiatives with initiatives such as global ERP deployments and migration. These require significant initial capital investment, and will face greater scrutiny from the CFO.

However, such initiatives can be executed by adopting a “cash-flow neutral” model. Companies and service providers will have to partner to support capital or cash flow neutral transformational (outsourcing, IT projects) initiatives. This could involve innovative deal structures and pricing models, from the service providers, where they can free-up the cash for clients during initial term of the deal and help ease cash flow issues.

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2) Technology Trends

a) Cloud Computing

Increase in Cloud computing applications is promising to present greater opportunities for the clients. After the e-business era, cloud computing is one of the major technological changes that could transform businesses globally.

In the coming year, Cloud computing will become more popular as budgets are reduced in a depressed economy. As US increases investment in infrastructure in the coming months, it will go a long way to support cloud computing with much higher and speedier bandwidths being available for corporations.

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As firms face increasing cost pressures, we expect clients to be migrating to cloud based applications such as email, to reduce the infrastructure requirements and manage costs better.

However, this is contingent on the specific business needs and the operating environment. We expect that increased IT transformation to SaaS will continue. Service providers will have to offer attractive SaaS capabilities as part of their application services portfolio.

b) Going Green – More than Ever

Green IT started picking up steam early last year, and has now safely crossed the initial hurdle of apprehension among the buyers and industry participants. The benefits of going Green are now well understood and established.

Green computing combined with economic stimulus will create significant incentives for providers and service recipients. The new US President’s energy policy could also create opportunities for service providers who can lower the carbon footprint for service recipients. Certainly those providers who can raise their green profile will have a better opportunity for landing new business. Government agencies are certain to have energy usage become part of their selection criteria in 2009. A significant portion of commercial contracts are also likely to adopt green-sourcing processes.

For service providers it would mean greater adherence to corporate best practices. Taking a leaf out of recent World Bank-Satyam episode, other providers will be put under scanner. Concerns of inadequate corporate governance in geographies like India and China, will be seen as an opportunity by other evolvinggeographies, who can position themselves as risk mitigation options.

d) Global Locations

Service providers would continue to look at newer delivery locations for geographical diversification and low cost talent pool. We expect newer locations in Africa and Latin America to be explored and adopted by leading service providers to help expand and de-risk.

The driver for this will mainly be availability of language capabilities and near-shore/ same time zone presence, enabling cultural affinity and ease of management. These expansions would be executed both through green-field expansion as well as acquisition of captive operations of some of the US & European MNCs, as they look to monetize their investments.

Besides investments in Africa and Latin-America, leadingservice providers will move into Tier-II and Tier-III cities in India and China to compete more effectively. Service providers are already expanding into cities such as Tianjin and Wuhan in China.

e) Outsourcing to domestic locations

With the new Obama administration in USA, we expect few low skill jobs such as call centres to be reverse sourced to US, where unemployment is rising.

The reverse sourcing would be primarily to boost employment, leveraging low cost cities within USA. The higher end jobs would continue to be offshored due to skill shortage. This would be reverse of earlier philosophy of offshoring, where low skill jobs were being offshored first.

f) Consolidation among Service Providers

With margins on the decline and business losing steam, especially for smaller and mid sized service providers in India, China and Philippines, we expect significant consolidation opportunities in the marketplace. Service providers will look at opportunities for expansion and consolidation in their chosen areas and look at suitable partners both in delivery locations as well as client locations.

With slow-down affecting many small to mid service providers in western geographies, we believe this would present significant opportunities for offshore based service providers to augment their onsite capabilities. Leading Chinese providers will also be looking for expansion activities overseas and M&A opportunities to strengthen their onshore capability.

 

3) Sourcing Trends

a) Outsourcing of non-Core Functions

In 2009, outsourcing of non-core functions especially in the BPO space will be an “imperative”. With clients facing uncertain times, there is a need to optimize and make the operations efficient. The firms would need to direct their energies to use slowdown as an opportunity to re-invent themselves by embracing newer realities of business. This would be best accomplished by remaining focused on the core businesses and leaving the non-core activities to external specialists. We expect this to be adopted on a large scale by SME firms during the year. However, as pointed out earlier, there is a need to make these transformation initiatives as cost neutral, thereby minimizing cash outflow.

Some of the firms with their captive set-ups would also look to monetize these assets in the coming year. Such divestments would help firms get rid of non-core operations; right-size and most importantly provide immediate cash-flow. We have already started seeing such transactions with Citigroup leading the way. We expect this to accelerate in the coming months.

b) Service Provider focus on SMEs

As the bigger firms have bagged all the headlines with their issues and troubles, the problems of the SME segment have not yet come to the fore. However, there is considerable pain for SME sector the world over, with several fighting for their existence. SME’s would require focused solutions from service providers to help optimize their operations and make them competitive. We expect significant activity on this part from service providers, especially leveraging cloud computing solutions to offer cost competitive business solutions.

c) Corporate Governance

Learning from the current meltdown has brought to fore the need for effective Corporate Governance. Onus is now on firms to ensure implementation of proper disclosure policies, compliance systems and effective reporting. This would demand appropriate investments in best practices.

 

Most companies are also working towards making their “supply chain cost”, insensitive to fluctuation in oil prices. Clients will seek alternate business and technology solutions to achieve this end, providing new opportunities to service providers. Clients would also increasingly look at IT-BPO convergence and Shared Services Consolidation, enabling them to run more efficient operations, and also seek greater commitment and ownership from both internal and third-party service providers.

c) Innovative Initiatives – Need for Cost Neutral Sourcing

With the current combination of decreasing revenues, tight credit market, weak balance sheet and capital problems, enterprises are seeing IT budget cuts to the tune of 10-20 percent across sectors.