It’s a Sourced World After All: Scenarios for a Recession

Sid
Pai’s recent blog on a likely U.S. slump led me to conclude: Globalization means that contagion spreads quickly
and broadly — a large country’s pain causes the world to ache — and the
resulting economic fallout induces near-sightedness in senior executives. Recession
leads to shifts in outsourcing trends, in turn requiring realignment of IT and
business process strategies to take into account newly created risks and
opportunities.

 

 

But before we start dissecting
strategies, first some context:

• Market conditions, such as recessions, influence spending on IT and
  business support services. Pressures on sales performance show
  up in the form of less spending on operations, including IT and other support
  functions.

• Contracting strategies among U.S.-based companies affect the IT Services
  and BPO services industry globally. When the largest
  consumer of outsourced services switches gears, the effect will be felt beyond
  domestic partners.

• Outsourcing spending is not discretionary. Unlike project-based
  contracting, outsourced services are part of core operations and will remain so
  throughout a recession.

Now let’s look at how a
recession scenario likely would play out by group, starting off with the corporate buyer. 

• Recessions drive demand for variable cost structures. Historically,
  outsourcing has caused corporate costs to vary, with beneficial effects seen
  both in times of an expansion or contraction, as outsourced functions react
  quickly to economic conditions.

• Time to savings is a top priority. Executives are slow
  to act on long-term structural changes to business-support functions, but with
  the declaration of recession, companies will act on costs.

• Captive operations are
  candidates for unloading.
  With capital access pressures,
  productivity challenges, and higher wages in developing destinations,
  notably India, companies that operate their own, captive, offshore
  operations will look increasingly toward contracting services via
  outsourcing.

• Expansion of existing relationships possesses attractive alternatives.
  Pressure causes action, and clients quickly turn to existing service providers
  with an eye toward increasing the scope of work and cutting costs. 

• Demand management becomes a core requirement. Acquisition of services, their
  complexity and variety,
  will be scrutinized. Service providers have no appetite for new service variants,
  and will be looked upon for simplicity.

Second, service
providers face risks:

• Many outsourcing relationships lack flexibility.
  If the contracts and relationships do no adapt to changing demand profiles,
  business results may take a hit, and services may be dialed down.

• Clients economize strategic service provider relationships. Clients
  select the strongest partners to weather the recessionary storm – and will
  resume growing with these partners.

• Lack of standardized offerings erodes the benefits of scale.
  As clients contract for services, economies of scale are crucial. Overly
  specialized incumbent-client relationships lacking broader leverage leave service
  providers beholden to their individual clients.

Finally, service
providers are presented with opportunities:

• Enterprise-wide application of outsourced services becomes appealing.
  “Partial outsourcing” is not uncommon, with some discrete corporate functions
  serviced internally. Providers may see an increased appetite for scope extension
  to accommodate other operations.

• Conversion to outcome-based contracting increases.
  Clients move from effort-based contracts to direct productivity improvements
  and widened risk/reward characteristics, potentially improving margins as well
  as volume and scope of services.

• Unification of technology and operations for outsourced delivery is
  considered more favorably. Companies that use outsourcing for
  technology support will consider “vertical BPO” constructs that transition
  elements of operations to the service provider.