Rigor and Standardization

"Clients will be increasingly open to changing their internal processes and accepting standard services in 2012," predicts Bob Mathers, principal consultant for Compass Management Consulting. "Service providers will put renewed emphasis on internal initiatives to standardize their own offerings to leverage economies of scale and stabilize profit margins." It's the stuff of benchmarking dreams, but economic conditions may turn it into a reality. Stan Lepeak, managing director of global research for outsourcing consultancy EquaTerra KPMG, also predicts more process, technology, and location standardization including platform-based solutions.

Sluggish Demand and Pricing Pressure

“The demand environment for service providers will remain tentative in 2012 given the watchful approach of global buyers, and optimization will be a strong focus for organizations looking to extract more value from their sourcing models,” said Eric Simonson, managing partner-Everest Research.  For year 2012, sluggish activity is expected due to macroeconomic and political uncertainty, with greater confidence likelier later in the year; but more attention will be paid to global sourcing management and consolidation initiatives.  Buyers’ IT budgets may be suppressed by fears of a second economic slowdown due to the debt environment in Europe and the macro environment in the U.S.

Pricing pressures will squeeze providers’ margins, especially offshore, forcing investment in newer customer-centric solutions and innovative engagement models. Domain/micro-vertical expertise will be emphasized as buyers focus on business innovation.  Overall, margin pressures will continue to be a challenge for service providers. There will likely be continuing strategic convergence between offshore and MNC service providers.

Vendor Landscape

Larger buyers will continue to drive the spending budgets in both infrastructure outsourcing (IO) and ADM, and will focus on vendor consolidation, providing growth opportunities to larger players, both offshore and MNC. This will lead to further growth disparity between large and small suppliers. Regional service providers will increasingly emerge globally and significant M&A will continue, with Tier-2 suppliers the prime targets.

Cloud Adoption

In the past, technical and perception issues have caused cloud adoption challenges. But continued capital investments will result in new and sophisticated solutions that will lead to new hybrid models and new integration approaches, making cloud adoption more mainstream.

The rapidly accelerating use of enterprise mobility, social networking and cloud services in workplaces will increasingly require integration into mainstream corporate networks, driving more corporate spend in this area.

Smaller Deals

In 2012, macroeconomic factors could force reduced IT spend, with buyers doing smaller number of deals with simpler pricing models, amid strategic convergence between offshore, MNC service providers. Global sourcing stakeholders will continue to pursue new locations due to talent, cost arbitrage and risk diversification-related considerations.

Hybrid and Captive Sourcing Models

Companies will continue adoption of hybrid captive/third-party sourcing models in 2012, and efforts will be made to improve captive value by focusing on high-value processes. Captive investments will continue with the majority of setups and expansions occurring in the Asia Pacific and CEE geographies in the year to come.

For example, in the year 2011, IT service providers opened 32 new outsourcing delivery centers in the third quarter compared to 17 the previous quarter. HP led the way by announcing ten new locations, followed by Dell, which announced four. Convergys, IBM and Tech Mahindra each announced three new centers.