The Conservative-Lib Dem coalition has imposed a £100 million cap on government IT contracts as it seeks to cut spending and reduce the budget deficit. According to a new Ovum report*, a total of 35 IT and business process outsourcing (BPO) contracts in UK central government are valued in excess of this limit and are therefore at risk – in theory at least.

John O’ Brien, senior analyst at Ovum and report author, said that while it is highly unlikely that each of the 35 £100m-plus contracts will be changed, there is ample room for the new administration to make significant cost savings.

He said: “Cutting expenditure on these major deals by 10-15% over the next few years would amount to between £270 million and £408 million being removed from current central government IT spending annually.”

Ovum believes the new government will seek “quick wins” where possible. TCS’ record £600 million contract with the Pensions Administration and Delivery Agency (PADA), signed with the previous Labour administration just weeks before the general election, will be one of the first facing renegotiation.

Beyond this and the controversial National Identity Register (NIS), the government can be expected to begin targeting existing IT programs that are perceived to provide limited value, or return on investment, such as Serco’s £100 million+ BusinessLink contract with HMRC.

Despite the new ‘age of austerity’ in government, Ovum believes significant opportunities remain for IT outsourcing and BPO suppliers who are able to understand and respond to new demands.

“There is no getting away from the fact that the new government has made winning new IT business more difficult”, conceded O’Brien. “This is going to make life far tougher for many suppliers over the next few years. Some will undoubtedly turn away from the market, and look to sources of opportunity in other verticals.

“For those prepared to stay the course, however, new opportunities will emerge. David Cameron has thrown down the gauntlet to the private sector to assist Britain’s economy return to growth. This means that the new government will be seeking ideas and solutions from the private sector.”

He added: “A key message to IT services suppliers is that it is not all doom and gloom. The government has not waged war with the IT industry – just with programs that are perceived to be poor value for money, too risky, and which do not meet its political aims. Therefore, we do not believe these new policies will spell an end to the £8.5 billion a year public sector IT service market. In fact there is quite a lot for IT service suppliers to be quietly optimistic about if they are able to successfully navigate this difficult period, and look to the medium to long term.”

A global survey* by the independent technology analyst has found that organizations are contemplating reducing the outsourcing of security and other IT management applications.

Of more than 500 CIOs surveyed by Ovum, only 7% said they were considering outsourcing IT security over the next two years, down from 18% currently.

Rhonda Ascierto, senior analyst at Ovum, described the planned reduction in IT security outsourcing as one of the most striking trends revealed by the survey.

She said: “The main reason for this shift away from IT security outsourcing is most likely a lack of confidence. Organisations are now more subject to compliance considerations in the form of both formal external and internal policy-driven requirements, particularly in the wake of the US banking controversies and other financial scandals.

“Some may find it difficult to obtain a measurable security metric from an outsourced provider because security is often reported only after negative security occurrences. If security is not breached then there is nothing to report.

“The reversal of outsourcing security is also likely to be due to some organizations grappling for more control over their IT operations, of which security is a central aspect.”

Additionally, contractual clauses from outsourcers often do not give the quantitative assurance that organisations need or desire. This may be viewed as a problem with IT outsourcing in general, rather than IT security specifically, since any failings impact the whole business while the contract is limited to the aspects of the IT operation that are outsourced.

Ovum believes this may have contributed to growing unease about the security of outsourced IT in general, with IT security outsourcing simply being the first part of the spectrum to feel this change of mood.

Sourcing is a critical management tool, but must be considered in alignment with the longer-term business strategy as well as operational effectiveness.

“How do we achieve the “promised” 25% to 50% savings? Buyers must embrace a well-thought through strategic sourcing approach that considers the current situation (in terms of principles, current capabilities, risk profile and business drivers) and market competence, first and foremost.” Jens Butler, Principal Analyst, Ovum

Approaching sourcing in the wrong way can lead to problems, non-achievement of the targeted outcomes and even negative publicity.”By not aligning with the longer-term goals, it can potentially put the organisation’s health on the line”, said Butler. “We have seen engagements, for example, where initial short-term price reductions constricted the future growth path of the organisation and ultimately damaged the longer-term vendor relationship.”

London – The maturing knowledge process outsourcing (KPO) market represents a significant growth opportunity for vendors, according to a new and pioneering report by independent market analysis firm Datamonitor, titled “Trends in Knowledge Process Outsourcing – Growth Opportunities in High-Level Processes”. This research discusses the main players currently active in the sector, analyzes how the ongoing global recession will impact on the demand for KPO services and assesses how providers of KPO services can best position their offerings in order to take full advantage of the sector’s blossoming potential.

“KPO represents the next stage in the evolution of the outsourcing market,” says Ed Thomas, analyst for business process outsourcing (BPO) at Datamonitor and author of the report. “Unlike BPO, which refers to the transfer of mainly transactional, non-core processes to specialist providers, KPO involves the outsourcing of core business processes, for example planning and auditing, which require a high level of domain expertise.”

The KPO market continues to grow in maturity

The origins of the KPO industry can be traced back to the late 1990s, but it was not until 2003 that the market really began to gain traction. At that time, KPO was the subject of a large amount of hype, which led many within the industry to make bold claims about how fast it would grow.

The intensity of this hype has gradually died away and, since 2006, a more mature KPO market has begun to emerge, with a significant amount of consolidation taking place and a growing awareness, among both vendors and clients, of the full extent of what could be achieved through KPO services.

Offshore delivery has remained a constant feature of KPO

Thomas points out that, throughout the evolution of the KPO market, one feature that has remained constant is the leveraging of offshore delivery models. “India has been the focal point for the KPO industry since its inception. Increasingly, however, KPO vendors are adopting a multi-shoring approach to service delivery.”

Datamonitor has identified eight key locations that have emerged in recent years as viable options for KPO service delivery, including China, the Philippines, Sri Lanka, Hungary, the Czech Republic, Canada, Mexico and Brazil. The report assesses the strengths and weaknesses of these geographies and looks at how they can form part of a vendor’s multi-shore delivery model.

Clients have concerns over the outsourcing of core business functions

Unlike the established horizontal BPO areas, such as finance & accounting outsourcing and human resources outsourcing, which focus on non-core aspects of the client’s business, KPO involves the outsourcing of core business functions. Clients are often reluctant to relinquish control over areas such as planning, auditing, analysis and research and development to third-party vendors, with quality and security being the major areas of concern.

Vendors can take steps to alleviate customer worries, such as aligning themselves with established business standards that cover process quality or security capabilities, or by offering services on a short-term, single-project basis.

Thomas notes that KPO enables clients to tap into large pools of talent and leverage skills in niche areas, which otherwise would not be open to them. “By improving efficiencies and freeing up resources within the client’s own organization, KPO can help to improve customers’ time-to-market, a business benefit which goes beyond simply delivering ‘your mess for less’ services in the style of transactional outsourcing.”

The KPO market remains extremely fragmented

Despite recent trends towards consolidation, the KPO market remains extremely fragmented. When the hype around the industry was at its height during 2004/2005, new vendors claiming to provide KPO services would appear on an extremely regular basis. While many of them have not survived, a significant number did, and are still operating.

Thomas notes that, despite recent consolidation, scale is of lesser importance in KPO than BPO. “Whereas BPO vendors typically harness economies of scale to deliver significant cost savings, the main selling point of KPO is its ability to deliver targeted, domain-specific knowledge, with scale playing less of a part in a vendor’s go-to-market proposition.” Niche providers are therefore capable of competing with, and even outperforming, the giants of the outsourcing industry.

London – The current economic crisis is forcing outsourced contact center providers to revisit tried and trusted methods of providing their services to clients, asserts a new Datamonitor report, Managing outsourced contact center functions during the economic slowdown (Strategic Focus). With prospects and existing clients looking for more creativity than ever in how their products / services are represented, outsourcing vendors need to determine new ways of delivering customer service, marketing & sales, technical support and debt collection.

Customer service in the recession means end-user retention at lower costs

A clear signal that the recession has impacted both outsourcers and their clients relates to a change in customer service delivery goals. No longer is increased revenue generation cited as a principal objective; rather, the need to ensure a maximum degree of end-user satisfaction is key. Datamonitor lead analyst for contact center outsourcing, Peter Ryan explains:

“In a recessionary period, outsourcing clients are more concerned with retaining as much of their client base as possible. Clients understand the opportunity to cross-sell and upsell will come with the recovery, but the immediate future means keeping customer churn to a minimum. If this can be achieved through lower-cost alternatives, such as automation or offshore / home-based customer service agent delivery, all the better for the client’s bottom line.”  

Marketing & sales – shifting from telemarketing to relationship management

Once the bastion of telemarketing related services, marketing & sales in the outsourced contact center has evolved in recent years. The growth of ‘do-not-call’ lists across both developed and developing economies has made outsourcers and their clients become more creative in how to use outbound functionality. Many have opted for warm-calling approaches in which customer service agents contact end-users with whom the outsourcer’s client has an established relationship, so as to ascertain their satisfaction with a recent purchase. Not only does this re-enforce the commercial relationship, it also affords insight into future buying, and can also lead to immediate cross-sell / upsell opportunities.  

Technical support is evolving in sophistication

The domain of technical support is no longer the commodity it once was, with more consumers globally using devices and solutions that are more complex than ever. However, according to Ryan, this is an area in which contact center outsourcers have the chance to win significant business in the coming years. “There exists significant opportunity for contact center vendors in the field of technical support. Clients selling any type of technology are tired of the headaches related to recruiting savvy customer service personnel who can address end-users using multiple channels and guaranteeing excellent levels of interactions. A savvy outsourcer, using a combination of offshoring and automation, can not only take on and improve the technical support end-user experience, but also do so at a reduced price. In the technology sector, where margins are constantly being squeezed, this is an important success factor.”  

Debt collection holds promise for outsourcers

Debt collection and accounts receivable management have been highlighted by many firms recently as a growth area within outsourcing. This is due to rising personal indebtedness in western markets, and the need for creditors to recoup these funds. However, there are a number of obstacles for outsourcing vendors looking to enter this space. Datamonitor has identified statutory compliance requirements and saturated markets as being among the most important. But, if an outsourcer is willing to invest the funds necessary to take on the right management team, or potentially buy a debt collection specialist, the long-term rewards could be significant.

London – Despite the fact that enterprises globally are planning on keeping their IT budgets flat and there will be no growth in 2009, a new report by independent market analyst firm Datamonitor reveals that in some countries, enterprises are much more confident about their future outlook with planned IT budget increases outstripping IT budget decreases. Titled ‘How Will IT Budgets Hold Up in 2009‘, the report also goes on to reveal that even in the industries worst affected by the downturn, there are opportunities for technology vendors.

“It is clear there has been a noticeable decline in enterprise confidence. However the findings are not as negative as might have been expected”, says Daniel Okubo, technology analyst with Datamonitor and the report’s author. “Despite the rise in the proportion of IT budgets which are remaining flat, there are still a sizable proportion of enterprises which are planning to increase IT expenditure. Technology vendors should be keenly aware that the economic conditions of a country directly impacts enterprise IT budgets.”

Rising number of IT budget decreases

Datamonitor surveyed 520 IT decision makers* towards the end of 2008 to gain an understanding of how enterprises are reacting to the global economic crisis, and to gauge their confidence levels.

Across all of the 14 countries surveyed in the second half of 2008, there was a rise in the proportion of planned IT budget decreases compared to a similar survey conducted in first half of 2008. The percentage of IT decision makers who plan to decrease their IT budget significantly in 2009 has risen to 8% from 3%, over the last 6 months.

(Table 1 below, compares the results of a survey conducted in H1 2008 with the results from the H2 2008 survey. If you are unable to read table 1 below, please contact the press office)

Confidence is lowest in the UK, France and Italy

In these three countries the proportion of respondents planning to decrease their IT budget outweighs those that are planning to increase their IT budget in 2009.

Noticeably, there are also a significant proportion of enterprises in the US and Spain that are planning IT budget decreases. Unsurprisingly all these economies are projected negative GDP growth in 2009.

(Table 2 below shows how enterprises expect their IT budget to change in 2009. If you are unable to read it, please contact the press office)

Enterprises in Benelux, Nordics and Australia are the most confident

Despite the bleak outlook for some countries, enterprises in Benelux, Nordics and Australia appear to be much more confident about their future outlook with planned IT budget increases outstripping IT budget decreases. These economies are expected to be less affected by the economic downturn, with the exception of Iceland, and this is reflected in Datamonitor’s findings.

Opportunities still exist in certain vertical markets

Even in the industries which have been the worst affected by the downturn such as manufacturing and retail banking, there are opportunities for vendors who understand enterprise requirements in a downturn.

In the manufacturing sector, software vendors are going to see demand fall in some areas, such as supply chain analytics, product lifecycle management and marketing customer relationship management (CRM) which are not viewed as core or essential processes. However, other areas like sales CRM, financials, procurement and manufacturing execution will continue to see healthy levels of investment and technology vendors should focus on these core areas.

Similarly in retail banking, investments will be made that: are essential from a regulatory standpoint; make a demonstrable improvement to a retail banks bottom line; and protect the institution from exposure to risk, be it lending fraud or operational failure. Investment into online channels will remain on the agenda, though banks have invested heavily in this area over the past few years.

These are just a couple of examples of where opportunities exist in vertical markets despite the forecasted global recession.

Okubo concludes:

“Datamonitor’s survey reveals IT budgets have been hit the worst in developed economies which are falling into a recession.  Although there is a noticeable correlation between an economies’ future outlook and projected growth in enterprise IT expenditure, there are opportunities in every vertical market if vendors understand enterprise requirements. Enterprises are more interested in raising efficiency than cutting costs. Technology vendors should tailor their sales and marketing to address the specific needs of the enterprises they are targeting, while taking into account the economic conditions they are operating in.”

Orbys has been part of Ovum since July 2006. Orbys’s expertise at the most complex level of sourcing, combined with Ovum’s in-depth understanding of the suppliers together offer a unique base for providing user organisations with pragmatic advice about their sourcing strategy, making Ovum Orbys a key advisor at the critical juncture between vendors and buyers, as recognised by this award.  

Brown-Wilson Group – the authors of the industry-respected ‘The Black Book of Outsourcing’, undertake annual surveys into organisations’ satisfaction with their outsourcing service providers and advisors. “Over 850 outsourcing contracts are investigated, with 20 advisor-specific key performance indicators used to independently measure clients’ overall level of satisfaction. Being nominated in any category is an excellent achievement but winning top honours overall is particularly impressive. Ovum and Orbys’s joint award was most deserved based on the feedback we had,” says Douglas Brown, Managing Partner, Brown-Wilson Group and Co-Author, ‘The Black Book of Outsourcing.’  

“We are delighted that Ovum and Orbys’s expertise in the marketplace has won them this prestigious award”, says Mark Meek, CEO for Datamonitor – owners of both Ovum and Orbys. “Enterprises must think carefully before embarking on a traditional sourcing approach and having Ovum and Orbys’s joint expertise recognised by the industry as the leading outsourcing advisor further reinforces our market leading brand in this space.”  

Increased quality of candidate is key, but cutting costs will become a major factor

While RPO vendors claim to reduce costs by up to 40% in some cases, it is the lure of recruiting a higher quality workforce that is driving growth. Although the strategic importance of recruitment means quality will remain of utmost importance, it is likely in an economic downturn that it is those who can deliver on both quality and price that will succeed. “Despite the expectation that outsourcing will thrive as companies search for ways to cut costs, increased unemployment will result in lower business volumes which will be reflected in the variable price nature of RPO contracts. But, this will be mitigated by the increasing demand for RPO from new clients,” says Patrick O’Brien, IT and BPO analyst at Datamonitor and author of the report. “For RPO to continue its rapid growth in the near term, vendors may have to go to market by pricing more aggressively as recruitment will need to be seen as a primary function for easy cost reduction among company processes.”

Offshore provision of RPO will increase despite vendor reticence

RPO vendors are split over the use of offshore provision.  Many players have little experience or understanding of how to derive the fullest benefits from RPO, while others see it as unworkable in recruitment services which require constant contact with both the client organization and, using the client’s brand, with candidates.

Approximately half of RPO vendors have some offshore workforce, mainly carrying out tasks around name generation, sourcing, early screening of resumes and other administrative duties. A few have moved tasks which involve contact with the candidate offshore as per customer demand.

“While there is a lot of resistance from vendors, the increasing competitiveness of the market and the growing focus on cost cutting in the economic downturn will push vendors into examining ways in which to begin to increase the use of offshore delivery,” says O’Brien.

RPO awaits global breakthrough

The first half of 2008 has seen a wave of acquisitions as vendors attempt to build out their recruitment expertise, technology capabilities and geographic footprint. A number of competing vendors still need to broaden their capabilities, and many of the larger vendors are looking to expand further overseas.

Some companies have put forward global request for proposals (RFPs), but these have subsequently been split into regions and handed to different vendors. The one-vendor global deal has not arrived yet, but a number of vendors believe that a breakthrough will occur in the next 12 months. The key reason for the break-up of global RFPs has been the fact that vendors do not have the capabilities to deliver on an international basis. Many have taken heed and are busy investing in international expansion, acquiring companies, building a global set of processes and forming partnerships with vendors in other regions. 

The report looks at the factors driving this trend, discusses the main players currently active in the market and analyzes possible strategies for including Latin America in a coherent global sourcing model. It also investigates the key BPO delivery locations within this region and the main business factors that will help companies choose the destination that best suits their needs.

“The last two years have seen a marked increase in the number of outsourcing vendors utilizing Latin America as a low-cost delivery location”, says Ed Thomas, associate analyst for BPO at Datamonitor and author of the report. “Key examples include major players such as IBM, EDS, Tata Consultancy Services and ACS, all of which have significantly increased their presence in the region since 2006, while providers such as Infosys and Cognizant have opened centers in Latin America for the first time.”

Latin America has a competitive advantage due to proximity and linguistics

Due to its geographical proximity, Latin America can be used as a nearshore location to serve customers in the US. This enables client and vendor to maintain a close relationship, including more face-to-face meetings, and also means that problems can be solved in real-time, without the delays that inevitably occur when work from the US is offshored to more distant locations such as India or China.

Operating in Latin America gives clients access to a major pool of native Spanish and Portuguese speakers. Particularly in the case of customer-facing BPO functions, this offers the potential to provide better and more efficient services to the Hispanic community in the US, as well as opening up the Spanish and Portuguese markets in Southern Europe. Providing local language services also improves the quality of services offered to end users, increasing customer retention.

Many vendors are using Latin America as part of a multi-shore delivery model

Thomas points out that, in the past, IT services vendors tended to pick one offshore location, usually India, and deliver a range of services from there. “Now, more and more companies are adopting a multi-shoring strategy, whereby they set up centers in a number of countries in different geographic regions. This not only allows them to provide services from closer to the customer, but also reduces the risks associated with housing all their operations in one location.”

Many vendors have expressed to Datamonitor a fear of ‘putting all their eggs in one basket’, mindful of the chaos that could be caused should India’s economy crash or wage inflation in the country hit new peaks. In this context, Latin America is an attractive alternative location for vendors with an existing presence in India.

Skill shortages and concerns over stability will hinder the region’s growth

One of the main drivers behind the rise of India to its position as the pre-eminent global sourcing location was its vast reserve of skilled labor. Similarly, up-and-coming locations such as China and Russia offer large untapped labor pools, enabling vendors to scale up a delivery center quickly.

Customers may find that Latin American countries are unable to deliver the kind of scale available in these other, more populous regions. This is partly due to simple population size, but it is also the case that regions like India and Russia churn out more technical graduates than their counterparts in Latin America.

Latin American countries can circumvent this potential problem by offering highly skilled services in niche areas. Also, the region’s positioning as primarily a nearshore location necessitates a different operating model from the one utilized in India, for example, in which scale is of lesser importance.

Thomas notes that Latin America also still has some perception challenges to overcome in its development as a sourcing location. “Concerns about stability (both economic and political) and security continue to hang over many Latin American countries, including Brazil, Mexico and Colombia. This may cause vendors to think twice before setting up there.”

The recent activity in Latin America is set to continue

All of the vendors Datamonitor spoke to indicated that they expected the recent expansion of Latin America’s IT services and BPO sector to continue for the foreseeable future, with more vendors moving into the market.

The investment by international IT services and BPO providers has tended to focus around certain countries (most notably Mexico, Brazil and Argentina) and certain locations within those countries (including Mexico City, Monterrey and Guadalajara in Mexico, Sao Paulo and Rio de Janeiro in Brazil and Buenos Aires in Argentina). There are many other cities within those tier one countries which could be tapped, and also many other countries within Latin America which are still to be utilized to their full potential.

The second tier Latin American countries identified by Thomas in the report (including Chile, Colombia, Costa Rica, Panama and Uruguay) in some cases still represent relatively unknown quantities for many within the IT services and BPO industry. These locations each have their own unique set of strengths and weaknesses, but are all viable sourcing locations, many of which have yet to be fully exploited.