Looking ahead to 2010
The Year that was 2009
Before I start prophesizing about next year, it is worth highlighted what changed in shared services and outsourcing in 2009.
The biggest news was that Xerox have entered the outsourcing market with their acquisition of ACS who were going nowhere pretty quickly, Dell also acquired Perot Systems to enhance their outsourcing capability whilst Satyam (don’t say it too loudly) were acquired by Tech Mahindra.
Shared Services and outsourcing executives would have noted a slowdown in activity through most of the year, with the uncertainty of the economic environment, the investment to kick off these projects were scrutinised more than ever before. However, as the year progressed, we noted an increase in activity with shared services and outsourcing programmes more actively signed off as the investment budgets were more readily approved.
We also recognised new outsourcing models being implemented, new industries targeted, new clouds on our horizon and new capabilities sought!
So what does this mean for 2010....
Consolidation of the industry
Gartner research suggested that 25% of the top outsourcing providers will not operate as separate entities by the end of 2012 - it really annoys me when headline grabbing numbers are plucked out of the air, and the reality is that there is very little chance of such a dramatic change. In fact, I will run through London at Christmas 2012 naked (not a pretty sight!) if this turns out to be the case!
However there is likely to be some consolidation in the industry. Of the leading players, I can see one of Accenture, Genpact, Wipro, Infosys or Cap Gemini being acquired within the next 18 months, with the most likely being Genpact or Cap Gemini. There sizes and culture will tend themselves to merger and acquisition talk.
The trend of buying capability and contracts will continue, in 2009 we saw Xerox acquire ACS for $6.4 billion, Cognizant acquire UBS’ back office for $75 million, Dell acquire Perot Systems for $3.9 billion, Infosys acquire McCamish Systems for $38 million, EXL acquire AmEx’s travel captive for $30 million and many more acquisitions.
TCS' acquisition of Citibank and Infosys BPO acquisition of Phillips in previous years, has set the tone for organisations to acquire capability and win a contract at the same time under a "sale and leaseback" type arrangement. Strategically, the acquisition route is a great way for suppliers' growth capability, stable revenue and referenceability in a short timeframe.
In 2010, we will find that smaller outsourcing providers will continue to acquire to grow their footprints and compete with the larger players whilst the larger providers will acquire strategically to win vital contracts and enter new markets!
The Japanese economy has been hit hard by the global recession and given the pressures to cut costs, has become a focus market for leading outsourcing providers. Notably, Japanese clients have set up shared services or outsourced locally or to China and Vietnam.
All of the leading outsourcing providers now have a presence in China or Vietnam, with Wipro in Vietnam and China, Accenture, IBM, Genpact and HP in the outsourcing hotspot Dalian (China), and Infosys and TCS have over 10,000 people in other cities within China.
ITO and BPO executives within each of the leading firms will confirm that a number of contracts from Japan are expected this year. Infosys and TCS are already looking for acquisitions in Japan to support the sales efforts in this region and throughout the first six months of 2010 - do not be surprised if a local Japanese shared service centre, or a Japanese outsourcing provider is acquired by a leading provider.
Expect also a number of $25 million plus contracts from the Japanese market being tendered in 2010.
Dell Chief Executive, Michael Dell stated earlier this year, "When you look at the healthcare space, it's the one sector of the economy that has the least amount of IT, and we see it as very promising for growth." Weeks later, Dell acquired Perot Systems, who already have a strong presence in healthcare. Dell also won a contract in July to provide IT Consulting through the Hunan Province.
Following the ACS acquisition, Xerox CEO Ursula Burns stated, "ACS is probably the world's leader in healthcare business processing. They have the largest position in Medicaid processing". And in March 2009, Infosys CFO, V. Balakrishnan said the company needed to scale up in the healthcare market.
In the UK, Steria have set up a joint venture with the Department of Health to provide Finance & Accounting, and Payroll services, however the market is ripe for an HR BPO provider to provide further services to NHS Trusts. In the US, the market is larger and still competitive and Continental Europe, Japan and China represent further opportunities.
Outsourcing vendors are competing frantically to become the vendor of choice for healthcare. However, in 2010 expect a number of vendors ranging in size and capability winning healthcare contracts across the globe. This will be due to the differing cultures and approaches taken by healthcare providers both within countries and across countries – some will be intimidated by the large blue chip or Indian providers selecting instead a smaller more flexible vendor to support its requirements.
What is clear, with the focus on cost reduction in a downturn in the economy, is that the model of healthcare will change in 2010 and more and more specialist providers will support the non core areas of healthcare (finance, payroll, IT, HR and so on).
Whilst finance, HR and procurement offerings have become increasingly commoditised offering lower and lower margins to providers, clients have continued to view themselves as unique from an industry and capability perspective, and complain that providers do not understand their industry and the culture embedded in their organisation.
This conundrum is driving BPO providers to the custom BPO route, where service provision is linked to transactional or higher value functions specific to an industry. The custom BPO model is becoming increasingly popular in the insurance, banking and utilities markets. In 2010 we expect this trend to continue with specific industry offerings becoming increasingly popular, in particular within media, entertainment and publishing.
So what is in store for the BPO providers in 2010?
In 2010, we will begin to hear practitioners say "no one was ever fired for hiring Genpact, TCS, Infosys or Wipro". Onshore capability will become increasingly important in winning BPO deals, and the providers that do not have that capability will either build or acquire.
The successful BPO providers will be open to change and setting up new models such as joint ventures and alliances to enter new markets – a model that Infosys, TCS and Genpact have already successfully deployed.
We will see that in the core BPO markets for finance, HR and procurement the market share experienced by the blue chip American providers will be significantly challenged by the Indian providers that are developing their credibility across these markets. It will be a challenging year for IBM, HP, Cap Gemini and Accenture who will all need to significantly change their ways of working and levers for success if they are to continue with the market share experienced in recent years.