The global-services market is here to stay, but like we said last year, not in its current structure. We have observed a transformation since the mid 1990s and we expect that trend to continue. The market has steadily moved forward, evolving from small projects to third-party engagements to captive arrangements. The next evolution will include new markets, new services, larger deals, more complex agreements, and more regulation around this everchanging industry. And with these changes we will witness challenges.

These changes are highlighted below under market, supplier, and client trends we expect to evolve over the next year.

Top Market Predictions

China strengthens its position: Chinese firms will enter the offshoring space in a big way in 2005. Instead of growing organically like many Indian firms, Chinese firms will make headlines by strategically acquiring into the market. Many firms will also expand their existing product-manufacturing sourcing presence into services.

Central and Eastern Europe become credible: Central and Eastern Europe will become increasingly credible markets for European clients, and will receive significant multinational attention and investment. Russian and Polish cities will effectively position themselves as viable competitors in high-end niches.

Governments work to position their countries strongly: Governments across the world will increase their efforts to position themselves as destinations for offshore services. New entrants include South Africa, Argentina, Brazil, Thailand, Ghana, Spain, Mexico, and others.

Japan as a strong target client market: Japan will emerge as a viable client market for countries beyond China. This new client will demand a different set of skills, especially Japanese language skills.

Regulations will increase: Established supplier markets will take a serious look at enacting additional standards to meet client demands for data security and privacy laws. The U.S. market will also see security and privacy regulation progress.

Top Buyer Predictions

Complexity emerges: Offshoring will grow in size and complexity as clients leverage early lessons. Expect significant analytical work in addition to data entry and data processing.

Captive ownership grows: Despite GECIS’ spin-off, clients’ increasing complexity of processes being offshored will lead to more wholly owned offshore subsidiaries for BPO, often referred to as captive centers. Existing captive sharedservices centers will become targets for further efficiency and expansion.

Disappointments surface: More than 40% of offshore initiatives will not yield anticipated savings, scale, or risk diversification. The key reason for these disappointments will not be due to supplier capability but buyer preparation and management.

Small and medium businesses weigh in: Small and midsize enterprises will finally move ahead as they weigh the benefits of offshoring due to budget pressures and a more accepting political environment for offshoring.

Multiple delivery centers: As BPO booms, companies with significant scale will choose suppliers that have multishore deliveries (multiple “hot”/ “live” sites), so work can be done simultaneously. This trend will play to the favor of large multinationals and large offshore firms.

New industries as leaders: More than 80% of the Global 2000 will have an offshore presence by the end of the year. The next big outsourcing industries: manufacturing, health care, and retail.

Risk management is a key consideration: Data security, compliance, and risk management will outweigh cost in decision criteria as BPO accelerates.

Top Supplier Predictions

Pricing remains stable: Supplier prices will remain stable overall, due to increasing demand competing with qualified firms and resources. As complexity of processes offshored increases, expect price increases in certain IT and business-process domains.

Merger and acquisition activity grows: Scale will become increasingly important. Anticipate more M&A, such as the Daksh acquisition by IBM and spin-offs of longstanding captive centers in India and other locations, similar to the November 2004 GECIS BPO center spin-off and external investment. Also, 2005 will see the first merger of a leading Indian supplier with a leading U.S. supplier.

Multicountry approach is imperative: Leading U.S. and Indian suppliers will grow through multicountry and secondary-city global “centers of excellence.” This is a must to meet growing demand at competitive prices.

New services evolve: There will be an increase in more complex service offerings, especially by the larger suppliers, as they commence offering consulting as an integral part of their capabilities.

Pressure for talent: Offshore supplier growth rates will put significant pressure on wages and talent in mid and senior management. This leads to higher compensation and higher attrition.

Margin pressures increase: Suppliers will face significant pressure on gross margins as costs increase. Much of this cost increase will be due to account management, salary inflation, and currency issues.

Looking Ahead

The role of offshore outsourcing will continue to grow in importance, while offshoring moves to a corporate “must have” discipline as companies develop more sophisticated global-delivery models across IT and multiple business processes. Geographically, India will continue in its leadership role as the supplier role model, with strong growth predicted for secondary markets. Of all the supplier countries, China and the Philippines are expected to mature most rapidly in 2005, with Central Europe—particularly Poland, Czech Republic, and Hungary—following close behind.

The new year will witness a bevy of M&A activity in the supplier market similar to General Electric’s recent spin-off of its India BPO unit. We also predict the emergence of multicountry supplier and delivery models that span the globe from India to China to Central Europe. In the client market, U.S. companies will no longer be the dominant buyers as Western European firms create strong demand for offshore services.

We see acceptance for offshoring as a foregone conclusion for multinational corporations that must keep pace with global competition, global supply, and global delivery models.