The Year Ahead

It's the time of year when most of us pause to reflect on happenings of the recent past, with an eye towards the twelve months ahead. I don't know whether or not it's a virtue to focus on annual cycles of things, but it certainly is human nature.

We've been asked recently by clients, service providers, media and equity analysts to offer our forecast for the global outsourcing industry. Now, I'm no economist and certainly would never claim to be a fortune-teller, but the question certainly merits an opinion.

Based on what we're seeing in the marketplace - from dialogue with senior corporate executives and discussions with lawyers and services providers in the industry - there are four primary moving pieces worthy of watching.

Offshoring: Labor Arbitrage Replaced by Value. So much of the outsourcing in India and other "offshore" locations is based on labor arbitrage. We see signs that enterprises are poised to focus on the value achieved through productivity in 2007. This theme isn't new, but seeing it in practice will be notable. The wage-versus-productivity battle frames the setting for multi-national providers such as IBM and Accenture to take on the fast-growing India-based providers such as Wipro, Infosys, TCS and Genpact. We'll see more head-to-head competition among these players in 2007.

Multi-Sourcing Models on the Rise: Corporate sourcing strategies will blend insourced and outsourced providers. Variants will exist across functions and geographies. We’ll see contract awards to multiple providers, with ultimate responsibility for integrating the services resting with empowered "centers for sourcing excellence" within the enterprise. Look for greater distinction among the corporate executive ranks of individuals who are chartered to set sourcing directions and unify the various delivery resources. For many, this is the re-emergence of corporate shared services.

Brazil, China, Eastern Europe, Mexico, Malaysia, and Philippines will Compete for Market Share with India: We believe that India will continue to lead in providing skilled labor for the accelerating global outsourcing industry, but other locations will participate in the global rising tide. While wages will rise across the board, productivity will come to the fore as the competitive differentiator. The wage differences will be minor, with corporate strategies for business resiliency, time zone proximity, language skills, and management of concentration risk providing opportunities for other geographies. China, with the greatest raw potential, will make significant movements in the acceleration of the English language acumen of its emerging workforce.

Service Providers will likely Consolidate into Two Predominant Groupings: The value proposition through outsourcing is polarizing around lowest-cost "transaction processors" and change-driven "business transformation practitioners". The gravitational force is around the degree to which outsourced solutions are commodity in nature versus those that deliver value through customized productivity. Additionally, many service providers will adopt greater vertical industry orientation. Contract terms will evolve to reflect the multi-year sourcing strategies of enterprise buyers. And, we'll see the introduction of real and meaningful gainsharing terms in 2007. Good news for the industry.

All in all, 2007 looks to be an exciting year for the global outsourcing industry - with opportunities for meaningful value to be created for both clients and service providers. As for mergers? If only I knew! One thing is for certain: if you run the leading service providers through the filter of these four moving pieces, there's opportunity for compounding through consolidation.