Knee-jerk Outsourcing Decisions in Current Markets?

With current recessionary markets, external sourcing is high on the list of ways to shed costs and access best in class service provision—as the $150 billion annual outsourcing industry attests to. However, this drive to cut costs needs to be balanced with clarity surrounding the strategic imperatives behind sourcing decisions.SSON spoke with global advisory and consulting firm Ovum’s Jens Butler, principal analyst in the Sydney, Australia office.

"What we are seeing a lot of at the moment is clients going back to their existing vendors and asking for a better deal," says Butler.

Given that many of these vendors are now 2nd or 3rd generation, this is not necessarily detrimental to the vendor, nor to the relationship, Butler believes. There is a certain underlying expectation that vendors are able to meet customers somewhere halfway—but in 12 or 18 months’ time the shoe will be on the other foot as the vendor benefits from an overall improved business environment.

However, there is a more important issue at stake. "By not aligning with the longer-term goals, it can potentially put the organization’s health on the line", says Butler. "We have seen engagements, for example, where initial short-term price reductions constricted the future growth path of the organization and ultimately damaged the longer-term vendor relationship. The worst thing someone can do is place a call to a large-name vendor with a pre-determined action list. You really need to do your homework by carefully evaluating your selection process and making sure the first question you answer is: ‘what are we actually trying to achieve’? Without being clear on why and where you are trying to cut costs, you run the risk of operating disjointedly from the main organization. In the short-term, costs may be saved—but in the longer term you may pay for it through limitations if not unforeseen penalties or bonus payments."

Another move Ovum has witnessed is towards managing risk-profiles more actively. A year or so ago, perhaps too much was taken for granted. But the Satyam scandal and the potential cash-crisis of vendors have made clients more cautious regarding vendor viability. There is a tendency for customers to flee to the safely of big names, Butler concedes. And yet the smaller sector is still going strong. With smaller firms being nimbler, increasingly more aggressive, and able to offer more flexible terms, shorter contracts and greater control from a client perspective, Butler has seen instances of larger incumbents losing out to smaller vendors: "Again: it’s a matter of getting a foot in the door and proving their value in these markets. And perhaps they’re counting on renegotiating a year or so down the line, once markets have recovered."

In the past, a number of factors may have worked against smaller vendors—not least the risk of them being acquired and existing terms perhaps not being honored. Right now, these contracts are being written such that the agreements are guaranteed in the event of a buyout. "With a number of large organizations like Oracle, IBM and Fujitsu going on a shopping spree, it is important that such guarantees are made," says Butler.

Whether small or large, Indian and Korean vendors are becoming increasingly aggressive and are expanding in the Australian and Middle Eastern service areas. "We’re seeing more of these kinds of firms bidding for business. Many are linked to the telecommunications industry, and so relatively cash rich. That is certainly driving some of this," explains Butler.
 
Ovum acts as a source of industry data, knowledge and expertise on the commercial impact of technology, regulatory and market changes. The company engages in continuous research and industry analysis to determine market dynamics in its specialist sectors. Ovum is part of the Datamonitor Group.