What Margins Indicate
Outsourcing has moved past early adoption to mainstream acceptance asserts James Friedman, a senior analyst covering business services at Susquehanna Financial Group, an institutional research, brokerage and trading firm. One reason is that there is “significant acceleration in SMBs [Small and Mid sized business] outsourcing, though as a rule SMBs are more inclined to outsource onshore.”
And there are several subtle drivers as well, he notes, ones that don’t get talked about very much in public. “Customers are increasingly aware that their competitors are outsourcing,” says Friedman. And this: “Customers are also aware that the dollar continues to slide against the Indian Rupee, the Philippine Peso and even the Canadian Dollar (long term).”
The demand for services is so healthy, he says, that “Offshore vendors have been able to raise prices in the last six months thanks to the high quality and perceived value of their work.” On his list of service providers with escalating prices are perennial Global Services 100 leaders such as Infosys, Patni, Satyam, Cognizant and Ness among others.
But not all market analysts see the world through rose-colored lenses. Rick Saia, Research Analyst/IT Services at Aberdeen Group, expects just the opposite to occur. “With the market for outsourced IT services more global in nature, a buyer’s market looms in 2007 since the broader competitive field will create downward pressure on prices,” predicts Saia. “Providers in other parts of the world, particularly Eastern Europe, are finding better seats in the IT services arena.”
Yet Saia believes that an escalating percentage of IT work will go nearshore rather than offshore. “This will not only improve communication between buyer and provider, but also serve as a help to IT organizations that outsource in order to access superior expertise,” he adds.
While Canada has come to be synonymous with “nearshore” in the United States, increasingly, Mexican companies are competing for work that might have gone north — or all the way to Asia. Alejandro Camino, VP, Marketing and Communications at Softtek, a services provider in Mexico, believes that he understands why Mexico is finally getting more attention. “In a nutshell,” he explains, “nearness plus world-class efficient quality, as simple and as complex as that.”
While there are many ways for service providers to separate themselves from the pack, a good customer reputation is a can’t-miss proposition. Affiliated Computer Systems (ACS), a pace-setter in our annual Global Services 100 study, strives for customer intimacy despite its colossal size and global presence. Al Denis, VP, Solutions Architecture, says, “We adapt to our [customer’s] way of doing business, which translates differently for each client, such as: Offering services in the global regions where they need us; offering pricing terms that are variable, fixed or transactional based on their business; being agnostic in terms of hardware platforms supported; or working in a multi-provider setting.”
Eleven Envelopes, Please
In a typical scenario of companies tapping the global-labor market, the driver has been cost savings or an operational expansion into a new region. In 2007 the more common justification is a lack of available skills. As you might expect, the vast majority of companies prefer to outsource rather than invest in an offshore delivery center with high fixed costs, tax and liability issues. Risk avoidance doesn’t grab the headlines, but it’s also contributing factor in the use of third-party services, even outside of the country.
Yet, even for resource-rich companies, tracking the world market for business and technology service providers is a complicated and expensive undertaking. Only a minority of organizations approach global sourcing in a systematic way with a formal program-management team sending scouts to far-flung destinations.
In this spirit we teamed up with neoIT for the third consecutive year to field an in-depth study of service providers spanning four continents. We vetted the providers much the way a program management office engages in an request for proposals, and selected winners in 11 categories based upon the strengths of the information they provided us, plus what we were able to glean from customers and industry analysts. We organized the winners into three basic categories: Customer and Business Process Awards; Regional and Emerging Provider Awards; and Tech- Delivery Awards.
Delivery Awards.
What makes these firms more special than the ones that ranked just behind them or those that finished out of the running in our respective categories? These firms demonstrated a pattern of market leadership, innovation and outstanding customer service. If and when your organization conducts a similar program to select service providers in a category such as engineering services, you can almost be certain that your results will vary — no two customer’s weighting systems are the same because everyone has different biases and priorities.
While high margin, transformational consulting work is where most service providers aspire to go, the lure of steady hosting and maintenance initiatives, back-office paperwork and customer contact centers is money that is rarely left on the table.
