Outsourcing Changes to Market Changes
Outsourcing continues to change in response to market changes, and a still uncertain economy. I expect the following trends to be apparent in outsourcing as we go through the year:
• Cloud concerns will increase – although I expect more companies to start implementing cloud-based solutions into their IT infrastructure, the struggle of complying with data protection laws, and a lack of contractual safeguards, will continue to slow the take-up by larger organisations.
• Mergers will increase – service providers, particularly the technology service providers, are likely to continue to find their established markets hard to predict, as customers take longer and longer to make decisions about their outsourcing strategy. I expect these pressures to lead to more consolidation in the market, and I would not be surprised to see 2 or 3 major deals announced over the next 12 months. In particular, I expect to see further consolidation among the second and third tier Indian vendors.
• Less established countries to increase their profile – Countries like Brazil and China, and possibly South Africa, Sri Lanka and Vietnam, are going to be seriously considered by companies looking to outsource beyond the traditional destinations such as India. The profile of these countries, and availability of skilled talent, has been steadily increasing and Brazil in particular is now looking to become a major player within Latin America. The introduction of data protection laws across Latin America over the last 12-18 months will also give comfort to organisations who might otherwise have been concerned about a lack of security and protection for the processing of sensitive data. Similarly, service providers are starting to shift their data centres to these regions to take advantage of these growing markets.
• Smaller deals will dominate. The trend for some time has been for customers to require shorter deals with easy routes of escape if required. Risk mitigation is the theme for most customers, and that requires a service provider to accept a shorter term, and “get out” clauses that enable the customer to exit the deal if market conditions change, or there is a change in strategy. This is, however, leading to a less strategic and more procurement-oriented mindset around outsourcing – which carries with it a risk that there will be less innovation and little in the way of transformation from service providers who have no incentive to be creative.
• Data Protection will become an increasing concern. The laws in Europe around data protection are set to change over the next couple of years, and fines for data breaches will be significantly higher. Data processors (ie: service providers) will also have regulatory responsibilities for the first time, forcing the industry to potentially adopt higher standards of security. Deals being signed will therefore need to anticipate some of these changes, and give more focus to this area, or face being renegotiated once the laws come into force.
• Legal Process Outsourcing to increase dramatically. One area of outsourcing likely to increase significantly over the next 12 months is LPO. Law firms are actively trying to minimise costs in all areas – and saving money through outsourcing is now becoming standard practice. Expect to see more service providers try to enter into this market, and for firms to continue to explore the outsourcing of legal services to offshore destinations such as India and South Africa.