Outsourcing Providers Introducing Standardised Services in Pursuit of Survival

Gartner: Outsourcing providers will increasingly institute standardised services as they try to generate better profits from their deals and to survive as competition for business becomes even tougher,. Service providers are trying to lower their cost of operations by investing in process standardisation, automation, utility offerings and remote management. These investments eventually will decrease costs and could boost providers' profits in the short term. In the medium term, these investments will likely keep providers more competitive and alive at lower margins. Service providers will also try to renegotiate their contract in mid-term if it is struggling to make its profit margin with a client. The market is changing as user requirements shift from supporting customised, internally focused IT environments to shared infrastructure, applications and processes that are based on open standards like AS8018.

• More than 50 percent of new outsourcing deals will include IT utility service components through to 2008;

• More than 70 percent of new application utility offerings will be targeted at business units or line managers, rather than IT organisations; and

• By 2015, 30 percent of all professional IT service jobs may be delivered from emerging markets such as India and China, rather than developed countries.

In an increasingly tough sourcing environment the period of consolidation of small and large operators is not yet over, especially in Australia, as evidenced by Commander's recent takeover of Volante and CSC's formal announcement that it is for sale. The growing presence and capability of sourcing firms in India and South-East Asian will add to this pressure as companies like Satyam, Infosys and NCS win more business in Australasia. In due course, the outsourcing market will see similar patterns of consolidation that have been seen in the enterprise application market, such as Oracle's acquisition of PeopleSoft and JD Edwards. Buyers of outsourced services risk facing wavering levels of service if their provider is either the acquirer or acquired. This continues to be a problem and users need to actively discuss their risk issues when their provider is in this scenario. Buyers need to make their expectations of service very clear and identify the critical services they expect to be maintained through the transition period. If buyers do not do that, they run the risk of their sourcing partner becoming distracted and even shedding staff to their detriment. Despite the continuing market trend for consolidation in the IT outsourcing industry, buyers should not be deterred from selecting small or medium-size companies as their sourcing partner. If there is a good cultural fit buyers should not be deterred. They should however include merger and acquisition scenarios in their ongoing risk management and ensure that appropriate 'opt out' clauses exist within their contract. Even amid the constant pressure for better performance from service providers that most organisations do not realise the true potential benefits of outsourcing and how it can ensure technology and improved processes are used to enhance profitable growth, reduce costs and achieve enterprise agility. Organisations will not thrive - or even survive - by simply cutting costs or employing suites of tactical outsourcing deals. Buyers who want to take advantage of cost-effective services will need to accept standardised services and one-to-many models in a more disciplined multisourced environment. The transition to more standardised services will significantly change the way providers deliver services, and change the relationships with their clients. Sourcing and Vendor Relationships d Publ 20060501