Perspectives on OUTSOURCING & OFF SHORING of IT & Business Services :  A Key Enabler for growth & success of organisations today 

THE NEXT FRONTIER: SMB SECTOR - OUTSOURCING - OFF-SHORING !!

 

 

 

 

 

 

 

 

  • In a recent NASSCOM and McKinsey report, some very significant numbers and facts were reported. The total global market for outsourcing of IT & Business Services was USD 500 BN in 2010 of which most f the outsourcing was almost entirely being done by large enterprises, mostly Fortune 1000 companies.

  • Interestingly,  most of the outsourcing of IT & BPO services was also being provided by the larger and perceived as safer providers of services like IBM, Accenture, TCS, Cognizant, Wipro, HCL, etc.

  • Meanwhile, the overall outsourcing volumes and pie has been growing driven by slowing economies and dynamic conditions of rapid business change, that most organisations are grappling with in most economies today. So organisations are now increasingly focusing on their core – and outsourcing non-core activities, besides benefiting from the cost, productivity benefits of off shoring to fuel their growth & profitability All analysis thus indicate that the overall future of outsourcing services is bright.

  • The NASSCOM - McKinsey report referred to above incidentally expects the outsourcing of IT & Business Services to increase three fold to USD 1500 BN by 2020.

  • If we drill into the numbers, the report estimates that out of the growth of USD 1000 BN, about 25% or USD 250 BN will come from mid-market enterprises in the developed world; another 25% will  come internally from the BRIC countries as they are also witness increased domestic outsourcing ( (and some portion of it will include mid-market outsourcing as well).

  • Now the current traditional segments who have been leading the outsourcing & off-shoring waves like Banking & Financial Services, Insurance and Telecom will continue to maintain a strong hold in the outsourcing-off-shoring sectors. So the remaining 50% of the incremental outsourcing is expected to be driven by these traditional segments, together with some new and emerging segments like the Public Sector, Defense and Healthcare.

  • The economic slowdown which tUSA and Europe is facing currently has made businesses extremely aggressive to find innovative solutions to survive and thrive, despite some political activism against off-shoring. So the overriding imperatives for outsourcing & off-shoring (such as fucus on core, business impact, productivity & efficiency & cost reduction) continue to be significant drivers of outsourcing & off-shoring.

  • Every small, mid and large organization is now also looking at strategic & innovative approaches to grow faster and if possible cut down costs to fuel growth and innovation, so are also focusing on their core businesses. Outsourcing of non-core activities has helped organizations & businesses to focus on their key business imperatives, releasing resources & time to enable faster growth trajectory, (as the savings can be reinvested in their respective markets for business growth and other business critical investments- such as R&D and innovation - so much critical today- given the significantly shorter product life cycles).  

  • More importantly, medium sized enterprises are now facing the same challenges that larger enterprises were earlier ( and to some extent still continue to face) – i.e dealing with rapid & dynamic change and slowing economies. Also they have observed – now for more than a few years, how their bigger peers have successfully taken advantage of outsourcing & off-shoring. So now they are equally keen to learn and emulate then - to obtain the same benefits of focus on their core businesses & reinvesting the cost optimization/reduction and business performance improvement in their core business’s growth – (i.e the very approach that the larger enterprise organizations have taken over the last 2-3 decades in IT & BPM services and for the last few centuries in manufactured goods and trading of commodities as well).

  • However we must note that the operating model of outsourcing –off-shoring between small and medium sized businesses (both on the procurement and the provider end) may be somewhat different than that for the larger enterprise organizations. Firstly, there will be a few challenges for the traditional larger IT& BPO services providers to meet the SMB sector’s needs.  The larger IT and BPO companies are generally not structured for providing services to the SMB sectors, and so are not likely to show a keen interest in the smaller deals(i.e owning to higher cost of acquisition and set up costs). Hence building an Eco-system of small & mid-sized IT & BPO service providers ready to take their business across national boundaries is important. Fortunately this has already happened over the last few years with a number of start-up and mid-sized IT & BPO firms having mushroomed in India and even In the host countries, who continue to focus as a business strategy on the SMB sectors in US and Europe and other such countries where the need for services outsourcing and off-shoring is now growing. This SMB to SMB engagement for IT & BPO services is now beginning and will continue to evolve in the near future.

  •  The whole outsourcing of IT and Business Services sector is thus evolving, with smaller sized deals in outsourcing/off-shoring growing. Small sized deals of less than USD 1 MN and USD 1-25 MN have grown in numbers to 11% of the total deals in 2011 and this number is expected to continue growing exponentially. New segments like Healthcare, Clinical Research Outsourcing, Defense, Media, e-commerce & retail, Utilities and Legal Process Outsourcing are slowly gaining ground and on the other end in the supply side, SMB service providers are also evolving in their domain strengths, although they will need to further hone skills, including cultural sensitivity of marketing cross border B2B in International markets and also core production & quality of services capabilities, to be able to be relevant for potential SMB clients in developed markets . The SMB market will pick up at a slower pace than what we witnessed fifteen- twenty years ago, but all indications are that it is growing and will re-define the way business is run & outsourcing is done in SMB sectors in the coming years.

 The SMB segments – The Next Frontier

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 - On the buyer side if we take the US market as an example- which represents the largest outsourcing buyer of the services globally (almost 62% of the total outsourcing from India is to the US), we see an interesting trend.

 - in the US alone 46% of its US $ 1.6 trillion GDP market is accounted for by the SMB segments. Similar trends exist for most other developed economies as well and focus on entrepreneurship and SMB sector development is on in most countries to grow their respective economies.

In the last few months minimum wages in the US have increased somewhat and political forces are indicating a further increase in minimum wages – which are already risen in some states. This  is likely to put pressure – especially in the SMB firms to consider outsourcing/off-shoring, as an option to fuel their growth & optimize their cost structure to enable them to compete effectively in the market with their larger peers. Click here to read more about the Seattle minimum wages hike to US $ 15/hour

 

 

  1. Hexagon Consulting’s Strengths as your consulting partner

Our consultants based at Delhi in India as, have deep understanding of the outsourcing and off-shoring sectors having worked both in India and most markets around the world including Philippines, Mexico, US, Europe, etc. We have  considerable experience of working with clients both in India and overseas in outsourcing & off-shoring Our core strengths have force multiplied with our partnership with beyondthehedge,US which are experts in marketing & sales - and do understand the needs to of the SMB market place in the US well.  We are passionate about helping organisations leverage outsourcing-off shoring services to win - both on the procurement and the service provider ends .

 

Above blog has been written by Hexagon Consulting’s seniorss, based on its deep expertise and experience of its senior consultants in the outsourcing & offshoring of services  globally, as well as the conulting & professional services work done in this space, and also important inputs derived from NASSCOM and some other data sources on outsourcing/offshoring. Talk to us to find out more about our expertise in this space & should you want any specific help or support in this space. Just click here - to learn more about our outsourcing-offshoring consulting practice area and leave your coordinates/questions on our contact page - and we'll be glad to help.