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.
