Looking Off the Radar
The reports recently released by TPI and PricewaterhouseCoopers looking at the ongoing growth in demand for outsourced services, and the shift in the geographical source of that demand, demonstrate yet again the invaluable role played by outsourcing in the development of the global business landscape. But they also demonstrate that as outsourcing continues its forward march, providers are faced with key decisions in terms of how, and where, to concentrate their expansionist efforts in the years ahead - decisions which will set the boundaries not merely for future competition among providers, but for the kind of terms available to organizations looking to procure services.
Effectively, providers looking for new sources of revenue have two primary options open to them: diversifying in order to increase the scope and scale of the work they already provide for existing clients; and attracting new clients. There are of course limitations to both these options - there is only so much work available from any given client organization; and only so many organizations to go round - but at any rate any provider with serious ambitions of becoming, or remaining, a global player must aim to compete on both fronts: the greater the quantity (quality being a given here) of services a provider can offer an existing client, at competitive cost, the less likely is that client to go elsewhere; while ignoring the opportunities posed by potential new business (and while there are indeed "only so many organizations to go round", in global terms that is a very great many) outside the company’s current portfolio is hardly the best way to ensure a healthy balance sheet in a decade’s time.
As a result, we’ve witnessed, as outsourcing has grown and flourished, the diversification of services offered by leading providers from what might initially have been core products such as IT or voice offerings to a truly dazzling array of capabilities. Any sell-side entity with the intention of being more than a mere niche or specialist provider (and while such a strategy is by no means without its benefits, we’re talking here about those companies looking to play in the big leagues) must now aim to compete on a very wide battlefront with offerings that can tick numerous boxes for firms looking to outsource. Indeed, with so many outsourcers now able to provide high-quality low-cost services in the "basic" areas of BPO and ITO, differentiation of capability beyond these core areas is crucial; as industry commentator Phil Fersht wrote recently in his blog Horses for Sources , "quite simply, there are several vendors today pushing services within a similar price-band and sufficient track record of successful delivery. Furthermore, most large enterprises have already experienced offshoring and outsourcing varying degrees of their operations for several years' now, and are smart enough to realize outsourcing provides an opportunity to deliver more than simply cost-savings".
Providers can achieve this differentiation either by building their own capabilities or through M&A activity - both of which options have of course been and will continue to be utilized by the major players throughout the history of outsourcing, but which require significant financial resources beyond the reach of most smaller firms now looking to get into an increasingly crowded marketplace. As a result, these smaller firms are increasingly looking to do battle not at the stratospheric levels of their behemoth , pan-capable competitors but in what remains relatively uncharted territory even for the biggest providers: among mid-market companies in developed economies for whom outsourcing is just beginning to become a headline proposition; and in developing economies which have until now remained off the radar for outsourcers busy fighting over business from marquee multinationals. Unfortunately for the smaller outsourcers, however, the eyes of the major players are also moving towards these uncharted territories, as they seek to complement the expansionary possibilities opened up by the diversification of offerings mentioned above with efforts to attract new business from companies and geographies which they might hitherto have ignored.
TPI’s Momentum Report released last month shows how certain large emerging markets are rapidly moving up the agenda for outsourcing, with India, China and Brazil all moving northwards on the "league table". The great joy for providers - of any size - is that such markets contain within them a large number of businesses for whom "early stage" outsourcing - basic BPO and ITO offerings - remain relatively new propositions. Compared with the US, UK and Canada (the top three locations on the TPI table) these markets might not yet compete in terms of sheer size of outsourcing opportunities (although as noted by TPI, and as should be obvious to anyone with even a basic understanding of global economic issues, the developing economies are making gains at this level too) but they are comparatively untapped in areas in which the biggest developing economies have already been exploited to a great extent over the past couple of decades.
Crucially for smaller outsourcers, many rapidly growing firms in emerging markets might now be reaching the point at which, say, a relatively uncomplicated BPO deal might be both feasible and sellable to their boards, but at which a more radical business-transformation-type agreement might still be off the agenda. Of course, the major players retain their advantages of size and experience, but it is far easier for even a start-up outsourcing business to achieve a foothold amongst these emerging companies than in the super-competitive markets of the US and Western Europe.
While China and India in particular - thanks to an existing concentration of activity on the part of large players - are probably not logical targets for companies thinking along these lines, plenty of other emerging economies, headed by Brazil, fit the bill. Any open economy big enough to support a number of the kind of businesses for which outsourcing is an option presents an opportunity here - in other words, a significant swathe of the world’s economies below G20 level, in which social and technological conditions are such that doing business is feasible. Providers with the determination and wherewithal to create the foundations - linguistic and cultural - for entry into one of these economies are able to focus on markets which might not be anywhere near as profitable in gross terms as the more traditional revenue sources, but which in terms of their ability to offer significant market share represent an infinitely more attractive proposal than the more saturated locations upon which outsourcers have traditionally focused - and in which it is still feasible to offer first-generation outsourcing services without also having to demonstrate more complex transformational capability.
The bottom line is that for many outsourcers the current environment is such that it might make more sense in the long term to aim to be number-one in BPO in, say, Uruguay or Angola than to attempt to fight the big boys on their own turf - even while they’re increasingly focused on fighting each other. However, the aforementioned big boys are of course well aware of the potential gains to be had in new, smaller markets, and it’s no surprise that the same firms who penetrated the likes of Poland and Romania several years ago are now sniffing around for opportunities in other emerging economies. So it’s very much a now-or-never scenario for those lower-level providers thinking outside the box - for as the recent surveys show, the attention of the outsourcing world is increasingly focused on the "new world" of unexploited economies, and it won’t be long before these unconquered territories too are brought into the broad embrace of the outsourcing industry. And, for shareholders, there’ll be significant value in having already carved out a respectable niche in an emerging economy when the very biggest players start looking for ways to increase their footprint in that neck of the woods…