Outsourcing will grow, driven by innovation, receding fear

Global expenditure on outsourcing services will continue to rise, 'back-sourcing' will become minimal, client control will increase along with their ability to manage contracts, and any existing 'fear' of outsourcing will soon dissipate.

These are the finding of a study put out by LogicaCMG. The study, undertaken by Professor Leslie Willcocks of Warwick Business School and Sara Cullen of Cullen Group, encompasses over 1,200 organisations from across Europe, USA and Asia-Pacific, compiling views into a list of `Top Ten' predictions for the next five years.

The study has also highlighted the importance of the CEO in executing successful outsourcing initiatives and notes that one-third of outsourcing deals could fail due to lack of CEO involvement.

Outsourcing of IT and other business processes is likely to move from a 2005 average of 12 per cent of organisational costs to 20 per cent by 2008. Business Process Outsourcing (BPO) will overshadow and incorporate IT outsourcing (ITO) and mainstream BPO expenditure is likely to grow worldwide by 10 per cent a year from $140 billion in 2005 to over $220 billion by 2010. Outsourcing is here to stay and 'back-sourcing' will be minimal at a tenth of contracts which come up for renewal. The most popular course of action at the end of a contract will continue to be to extend it with revisions, a quarter being re-tendered. In addition to this, the study states that outsourcing will help 'insourcing' and market disciplines will determine in-house service provision.

Innovative new value propositions for outsourcing will emerge and suppliers as a whole will become increasingly more creative in illustrating profitable business models that demonstrate value creation for customers.

Besides this, the study says that clients are taking control in driving and designing deals. This trend was reinforced in the 2001-04 semi-recession, but is irreversible. Clients will invest much more in active contract management and design.

"We expect to see a slow but rising tide of improvement in clients' ability to manage ITO, BPO and offshore outsourcing arrangements between 2005 - 2010. CEOs' and senior management involvement is imperative to make this happen," the authors stress.

The cost of getting to contract, which is between 0.4 per cent and 2.5 per cent of contract value, will increase but on-going management costs will fall between 3 per cent and 8 per cent of contract value.

Not all outsourcing deals will be successful and some 70 per cent of selectively sourced deals with multiple suppliers will be considered 'relatively successful' during 2005-2010. There is still learning to take place and as companies move up the outsourcing value chain, more successful deals will result.

Allaying fears about the outsourcing backlash, the study states that clients will transcend the hype and fear of outsourcing and as the market matures, clients will come to understand the power and benefits of strategically managed outsourcing initiatives, as opposed to concentrating on the FUD (fear, uncertainty and doubt) that has been inflated by the media.

The report has added that knowledge management will not feature on the radar screen and the hidden business value in knowledge leverage is all too often left behind on the bargaining table by both parties. The issues may be too soft for hard-boiled commercial bargainers.

Dwelling on how crucial the role of CEO is in outsourcing, the study notes that 'effective CEOs' care about outsourcing because not only is it an increasingly large expenditure to a company, but it can also affect an organisation's market valuation. It further observes that outsourcing can disable an organisation if not managed properly and if outsourcing is undertaken to drive down costs, it shouldn't be at the expense of other strategic or operational benefits.

"The study illustrates that CEO involvement will help mitigate risk and enable an organisation to use the outsourcing deal to create a more competitive position," said Simon Ormston, Outsourcing, LogicaCMG. "We are increasingly seeing leading organisations use a more blended service offering, enabling them to penetrate new markets more quickly, operate in new geographies, achieve greater agility and enhance strategic capabilities. It's only logical for the CEO to be at the forefront of this sort of business transformation."

Says Professor Leslie Willcocks: "For many organisations, outsourcing has become a major operational initiative. However, much of this is happening incrementally, in response to market conditions and specific opportunities to cut costs, rather than on the basis of long-term strategic thinking. CEOs, if they have not already done so, need to put a much more strategic footing in place to get the true benefits of outsourcing."

Future bright for BPO, but challenges are many

Outsourcing expenditure will continue to rise

BPO will overshadow and incorporate IT outsourcing

Outsourcing is here to stay and backsourcing will be minimal

Outsourcing will help 'insourcing' - market disciplines will determine in-house service provision

Innovative new value propositions for outsourcing will emerge

Clients are taking control in driving and designing deals

Clients will invest much more in active contract management and design

Not all outsourcing deals will be successful

Clients will transcend the hype and fear of outsourcing

Knowledge Management will not feature on the radar screen