Identifying the trends, challenges and cost benefits of outsourcing

a whitepaper from Computer Weekly

With economic conditions uncertain at the moment, many organisations are re-evaluating how and what they outsource. At the same time, user

expectations for on-demand resources are increasing, leading sourcing and vendor management professionals to adopt new governance practices to meet demands while reducing their companies’ exposure to risk. In this buyer’s guide to outsourcing, we look at these issues in depth, as well as identifying trends in the market and investigating the outsourcing options available to small and medium-sized businesses.

Contents

The state of outsourcing page 2

There is a growing trend for lower-value outsourcing contracts. Cliff Saran reports

The role of governance in outsourcing page 4

Take the lead in innovating for business outcomes and let suppliers look after the practicalities, says Bill Martorelli

The outsourcing options for SMEs page 6

Outsourcing can address SME technology issues only with carefully researched decisions, writes Clive Longbottom

Trends in outsourcing deals for 2012 page 7

Smaller services deals mean changing suppliers more often but higher margins for outsourcers, says Robert Morgan

These articles were originally published in the Computer Weekly ezine.

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The days of the multi-year, single supplier megadeal are over. The current economic uncertainty is leading many

organisations to re-evaluate how and what they outsource. Research track-ing trends in outsourcing contracts during 2011 is showing a distinct shift away from business process outsourcing (BPO) towards lower-value, smaller contracts, which often involve managing multiple suppliers.

Analyst firm Gartner is seeing evi-dence of organisations willing to change providers. In its Forecast Analysis for the outsourcing market 2011-2015, for the third quarter 2011, the analyst says clients are more will-ing than ever to change providers when not highly satisfied with the incumbent provider and offered a compelling price.

Looking at contracts over €20m in Europe, sourcing advisor TPI reports that in the past few years the number of outsourcing contracts across the globe has steadily increased, while values have been falling.

The number of global contracts val-ued at €20m or more reached a record high in 2009 of 831, a 23% increase on the 623 contracts recorded in 2008. Last year, the number of these high-value contracts dipped slightly to 764. In addition, total contract values in the UK and Ireland have fallen since 2008. Overall, TPI has witnessed a large increase in the number of multi-sourcing contracts over the past cou-ple of years.

On a global level, TPI says out-sourcing contracts are becoming shorter, with new contracts slowly decreasing from an average duration of just over six years to just over five years, in the past eight years. Restructured contracts have gone from an average duration of five-and-a-half years to four-and-a-half years over the same time period.

TPI’s research focused on the private sector (Figure 1, page 14). “In the UK, we will see a modest improvement in 2011, compared with 2010, but some way off where it used to be,” says Duncan Aitchison, president of TPI Europe. The sourcing advisor expects the total value of outsourcing contracts worth over €20m will be €12bn for the full year. At its peak, the UK outsourc-ing market was valued at €16bn.

Given the economic uncertainty, there are a number of drivers that may show where outsourcing is heading over the next 12 months.

Aitchison says there is a low level

quick implementations with faster payback, in contrast to the large, complex, multi-year programmes that were the norm a few years back.

Traditionally, clients would have transferred assets to the outsourcer. Aitchison says contracts today appear to be less asset-intensive. Similarly, the continued use of off-shore suppliers is exerting down-ward pressure on the cost of con-tracts, he notes.

Offshore and nearshoreAny assessment and analysis of the outsourcing market is incomplete without mentioning the offshore cat-egory. Offshore work – traditionally to India – has been used to lower the cost of software development pro-

The state of outsourcingThere is a growing trend for lower-value outsourcing contracts. Cliff Saran reports

jects, testing, support and maintain-ing legacy systems.

Lee Ayling, a partner in KPMG’s sourcing advisory, is seeing a rebal-ance between offshore (70%) to onshore (30%) from the 90:10 ratio last year. “Organisations are bringing more onshore,” he says. “This is being driven by the complexity of programmes that often require an onshore presence to interface with the business.”

Ayling believes major Indian out-sourcers may acquire local outsourc-ers to win such business.

When McKinsey looked at the out-sourcing market in August 2010, it identified a growing demand for onshore services, often in regions outside capital cities.

of business process outsourcing (BPO) activity. In BPO, total contract value in Europe fell 5% year-over-year and 31% sequentially. “We have had a progressive trend towards a higher volume of smaller transac-tions, and a distinct shift to a multi-source strategy, where users break up requirements into smaller contracts with shorter terms,” he says.

Cost cuttingGiven the volatility in the UK, Europe and across the world, corpo-rations are more nervous of transfor-mation programmes, so big systems integration projects and BPO are less popular. In fact, Aitchison says out-sourcing does not fare well at times of uncertainty, due to a move towards

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“Beyond lower wages, these regions offer skilled engineers in spe-cialised areas where demand is high, such as infrastructure management or application development and maintenance for new and legacy IT systems,” says McKinsey Quarterly’s IT services: The new allure of onshore locales report.

McKinsey found that some organi-sations were under pressure to diver-sify their portfolios of global IT ser-vice facilities. “Many companies are heavily weighted in just one or two offshore regions, which exposes those companies to inflationary pres-sures and currency volatility,” it says.

McKinsey also notes that in cer-tain, highly specialised areas, organ-isations are opting to develop and retain the work in low-cost near-shore locations. “This development is driven by the ability to procure and develop these scarcer skills in locations where a regular supply of them is available, and at a cost-com-petitive price relative to offshore locations.”

Better valueAitchison is seeing outsourcers locked in a battle to offer better propositions to clients. Along with the Indian outsourcers, he says most organisations operating around the world have offshore capabilities. “Many vendors, particularly Western companies, have delivered offshore capabilities, so there is no longer a huge disparity from India.”

Cloud computing is also changing the outsourcing market. “Our research among CIOs shows that 80% have plans underway. However a lot of projects are small-scale and pilots,” he says.

Aitchison notes that most out-sourcers are orienting their services towards cloud-like services – reflected in commercial contracts that are priced on a utility basis.

Technology such as virtualisation is also changing costs. “There are still questions on how much you can vir-tualise, and there is still a lot of work users have to do in terms of consoli-dation and rationalisation, which are important to leverage utility plat-forms,” he says.

Challenges of multi-sourcingThe move to multi-sourcing means organisations are splitting applica-tion and infrastructure outsourcing. “Current deals are being split up using two to three providers,” says KPMG’s Ayling. There may be one provider for infrastructure, while a business may take on two outsourc-ers for application outsourcing, playing one off against the other. In certain sectors, such as consumer

packaged goods, firms are bringing services back in-house.

In the Forrester paper The Changing Outsourcing Environment, Forrester principal analyst Bill Martorelli says multi-sourcing means CIOs should look towards developing more strategic supplier relationships, with higher levels of governance effort: “More outsourcing customers describe themselves as embracing a selective approach to outsourcing, one that relies on multiple providers.” 

He says many existing IT outsourc-ing contracts based on a single-pro-vider model are now being “refitted” to reflect the multi-sourced approach. “While multi-sourcing may not nec-essarily mean more vendors, it does result in the need to identify the most strategic, and most tactical, vendor relationships.” If any shortcomings in governance are present, the stress of attaining value across these strate-gic and tactical supplier tiers will result in strained outsourcing rela-tionships, Martorelli warns.

InnovationIn May 2011, EquaTerra, the sourc-ing advisory service that is now part of KPMG, conducted a survey in conjunction with the National Outsourcing Association (NOA), which looked at innovation in out-sourcing. The report, Driving innova-tion through collaboration, found that outsourcing buyers are not yet taking innovation seriously enough. This is not surprising given that con-tracts in 2011 have shifted towards multi-sourcing, with fewer large stra-tegic contracts. 

In the report, along with co-author Karene House, principal advisor at KPMG, Ayling says users and service providers agreed that improving quality and lowering costs are the most important, closely followed by decreasing time-to-market and replacing old legacy systems.

Ayling and House note that there is a disconnect between the way users and providers want to fund or are funding innovation (Figure 2): “We asked outsourcing users how innovation should be funded and providers how innovation is nor-mally funded. The majority of the service providers claim that innova-tion is included as standard in the service offering, while the majority of the users would like the funding to be agreed for each innovation item based on the value to the user and to the service provider.”

In the report, the authors warn that the challenge when it comes to funding any model, other than inno-vation being baked into the contract, is getting agreement to fund failure. According to Ayling and House, this

is a key requirement if you are going to achieve revolution rather than just evolution.

Clearly, outsourcing in 2011 is reflecting the uncertainty in the global economy. Outsourcers are under increasing pressure from off-shore providers, plus new players operating using cloud-based infra-structure. For datacentre hosting ser-vices, outsourcers are beginning to use virtualisation to offer private cloud services. But the cost benefits of virtualisation can only be realised once the user organisation has ration-alised and consolidated its IT server and application estate. 

The experts Computer Weekly has spoken to are seeing a migration

from large contracts to smaller, multi-supplier deals. And the advent of cloud computing is driv-ing utility-based pricing, even if the back-end services are not running as cloud services. ■

Figure 1: Contract trends by sector

Source: TPI

Figure 2: Innovation in outsourcing

Source: EquaTerra

* Contracts with TCV > £20m

Financial services

Manufacturing

Telecoms & media

Energy

Healthcare & pharma

Business services

Travel, transport, leisure

Retail

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While organisations con-tinuously develop and refine their outsourcing capabilities, many still

struggle to get the business results they desire from outsourcing. One particular difficulty is often found in achieving innovation and creating sustainable business value. One of the principal reasons for this is that customers too often go through the motions when it comes to outsourc-ing governance. While standards and procedures are defined (and in many cases met), there remain major gaps

mains unresolved. To achieve suc-cess in outsourcing, mature buyers know they must go beyond the con-tractual basics and breathe new life into today’s static methods.

One of the key lessons in outsourc-ing governance is that it does not and should not follow the same pattern of IT services delivery models. To think of governance as a “steady state” – the same way service delivery is ex-pected to achieve very predictable delivery – risks stagnation in the out-

SLAs are inherently backward-looking measures of supplier performance, built on the concept of punitive penalty

The role of governance in outsourcingTake the lead in innovating for business outcomes and let suppliers look after the practicalities, says Bill Martorelli

sourcing relationship. Injecting inno-vation into the outsourcing relation-ship is no small challenge given that customers and suppliers typically ex-pend enormous energies on service transition, only to succumb to “en-gagement fatigue” once it is achieved.

At this point clients are often left asking, “Where is the innovation?”.Other customers err by abdicating re-sponsibility for governance or avoid-ing conflict with their suppliers by adopting a passive posture. Although

between what is desired from the outsourcing relationship and what is achieved by suppliers.

Closing this gap starts with ad-dressing the basics of governance. Most outsourcing contracts have the typical standards, including a three-level governance structure, a set of service level agreements (SLAs), pro-visions for innovation and even defi-nitions of the interaction between the parties. Yet these contracts are typi-cally less prescriptive about the de-tails of what actually happens within the defined governance structure.

For example, both customer and supplier alike will often gather data, generate reports on activity and con-duct their meetings – but if they only address the surface of governance challenges, the real cause of customer (and supplier) dissatisfaction re-

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Not every sourcing organisation is prepared to manage governance at the highest levels of maturity. When crafting your organisation’s approach to governance, it’s important to start by evaluating your own sourcing resources and capabilities to determine your level of governance maturity.

This can be difficult, given the industry’s lack of an objective measure of sourcing maturity. But organisa-tions that start with this internal self-assessment can eliminate frustration down the road.

Attaining sourcing maturity is a long-term process, but it is important in contract negotiations. Mature sourcing organisations succeed with issues that may backfire

badly among less mature organisations.Old-style outsourcing was often conducted as a

“black box” with data about the engagement only seen during meetings between customer and supplier.

Today’s outsourcing environment is moving toward higher transparency, ideally when all such data is available to all parties all of the time. If you are not receiving the real-time data that you need to measure and assess the health of your outsourcing relationship, you need to push your provider for better reporting capabilities. Many providers are not proactively offering easy-to-use reporting capabilities, but will offer such services when asked.

How to evaluate sourcing maturityit may be difficult, customers need to set the pace in outsourcing by ener-gising the governance dialogue.

Oversight is suboptimisedToday’s approach to managing out-sourcing suppliers is fragmented. The seat of outsourcing governance varies along with customer organi-sational structures and is typically divided across the responsibilities of vendor management, strategic sourc-ing and procurement. The situation is even more challenging when busi-ness process services are involved. The continuing yet unspoken compe-tition between these diverse groups is a primary way that unified govern-ance can be compromised.

Although most businesses are posi-tive about outsourcing, customer sat-isfaction remains mixed. In particu-lar, customers regard suppliers’ ability to deliver innovation in a neg-ative light. One reason for this is that innovation is not always managed. It is often viewed by clients as an ex-pected side benefit, despite the fact that there are few, if any, provisions for achieving it in the contract. Senior executives are waking up to the fact that while outsourcing can deliver cost savings, they also need more from the outsourcing experience.

SLAs are one of the few things that outsourcing customers can hang their hat on for supplier oversight,

but the limitations of the SLA to achieve desired results are becoming apparent. SLAs are inherently back-ward-looking as a measure of suppli-er performance and are built on the concept of punitive penalties that are normally limited to 10% (more or less) of the supplier’s monthly re-curring revenue. SLAs often entail significant administrative overhead for reporting and data analysis. As a result, the importance of the SLA as the sole element of outsourcing gov-ernance is decreasing.

Governance modelsDespite the known challenges of traditional outsourcing, however, the

complexity of governance is increas-ing. Outsourcing is changing dra-matically, creating new governance challenges for sourcing and vendor management (SVM) professionals.

Multisourcing means more strate-gic suppliers, at higher governance effort. More outsourcing customers describe themselves as embracing a selective approach toward outsourc-ing, one that relies on multiple pro-viders. Many existing IT outsourcing contracts based on a single-provider model are now being revised to re-flect the multisourced approach. While multisourcing may not neces-sarily mean more vendors, it does result in the need to identify the

most strategic and most tactical ven-dor relationships. If any shortcom-ings in governance are present, the stress of attaining value across these strategic and tactical vendor tiers will result in strained outsourcing relationships.

Outcome-driven models make true supplier governance a higher priority. Organisations are looking to more outcome-driven contractual models. In these models, however, customers must learn to cede more end-to-end responsibility to their suppliers.

This places a higher premium on mature governance disciplines, since it requires customers to shift governance focus toward the busi-ness outcome, rather than the pro-cess itself. This is even more impor-tant as outsourcing customers look beyond their focus on SLA-based outcomes toward true business out-comes, which require SVM profes-sionals to first understand business objectives and help vendors focus on meeting them.

Cloud-based solutions will tax to-day’s demand management disci-plines. One of the major problems outsourcing customers have is de-mand management. To this point, cloud technologies have had little di-rect impact on demand management in outsourcing contracts, but they will have an increasing impact over time. The rise of cloud-based servic-es, coupled with uncontrolled spend-ing involving non-traditional suppli-ers, will eventually complicate vendor management oversight.

As user expectations for on-de-mand resources increase, sourcing and vendor management profession-als will need to adopt new govern-ance practices to meet demands while reducing their company’s ex-posure to risk. ■

this is an excerpt from the Forrester report The Changing Outsourcing Environment Requires New Governance Strategies by Forrester principal analyst Bill Martorelli

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The pace of change of tech-nology causes problems for organisations of any size, but for the small to medium

enterprise (SME) sector, it can cause critical issues. A new investment in a technology platform can become a constraint on the business as newer technologies emerge, but the busi-ness cannot afford to continue invest-ing in keeping everything up to date.

all operating systems, applications and device drivers as necessary; l The ability to create a cost-effective, highly available system that supports the business.

Whereas in the past, it was possi-ble to put in place a platform that could last for a few years, today’s technology dynamics tend to force changes on at least a yearly basis.

The aim of cloud computing is to provide small components, brought together as composite applications

The outsourcing options for SMEsOutsourcing can address SME technology issues only with carefully researched decisions, writes Clive Longbottom

How much IT to outsource?An option not generally taken by SMEs is to use support outsourcing, where the IT department is effective-ly outsourced to a third party. Large organisations often do this, letting a systems integrator such as IBM, CSC or HP take a greater or lesser control of their in-house datacentre. This lowers the company’s need to main-

Consequently, many SMEs consider outsourcing some or all of their IT systems. But this can be fraught with danger and any SME looking for outside help needs to be aware of what options are available to them.

The cost of not outsourcingThe positive aspect of deciding not to outsource is that the SME retains full control of everything – but this is also the main negative aspect. The SME needs to have:l The available datacentre facility in which to house the IT equipment;l The internal expertise to manage all IT equipment and update and patch

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l Infrastructure as a service (IaaS) – renting IT resource capability from a provider. Similar to the physical hosting model, an IaaS provider uses virtualisation to make resources available to the SME. “Logical” units of resource are applied – so much CPU, so much storage and so on – and this can be easily expanded as required through the provider enabling more of the resource pool to be used by the SME.

l Platform as a service (PaaS) – renting IT resource and operating system capability from a provider. Here, not only is the base level IT resource made available, but the operating system is also included.

Again, the key is to provide a flexible environment which can easily grow (and sometimes shrink) with the SME’s needs, without the issues that SMEs find with having to extend the capabilities of physical equipment under their own control.

l Software as a service (SaaS) – using a software application or function without owning any of the platform. Here, the provider takes ultimate responsibility

for the complete stack – the facility, equipment, operating system and application software stack.

Increasingly, the business model here is to provide such capabilities under a subscription model. All updates, patching, equipment replacement and so on are included in the subscription. The aim is to build up a critical mass of customers such that the model is self-sustaining.

Providers in this area include the likes of Salesforce.com, Concur and Transversal. However, Quocirca recommends any SME looking to a SaaS model carries out the requisite due diligence to ensure the SaaS provider has an existing customer base that supports the SaaS provider’s stated future aims.

Along with these basic cloud services, the SME will see many more – storage as a service, business process as a service and so on. While these may provide incremental capabilities over and beyond the services detailed above, for making a basic decision on what should and should not be outsourced, such additional services are better left out of the initial mix.

Cloud: infrastructure, platform or software services?tain levels of expertise in their em-ployees, as the outsource company now has assumes that responsibility - and service level agreements (SLAs) can have more teeth. 

SMEs are usually better advised to only outsource break/fix needs (the replacement of equipment under an SLA when it fails); basic systems management (root cause analysis and base problem identification along with remediation where possible); and overall asset lifecycle manage-ment (the installation, management and secure replacement equipment over an agreed lifecycle).

The datacentre, kit and stackNext is the choice of a co-location ar-rangement. A third party provides a shared datacentre facility where the SME can house all its IT equipment. However, the IT equipment along with the software stack still remain the property – and therefore the re-sponsibility – of the SME itself.

The SME still has to have the ex-pertise to create a suitable IT archi-tecture and maintain the software stack itself, although many co-loca-tion providers will either help an SME in their design or insist in vet-ting any design before allowing equipment into their facility. With co-location, power distribution, uninter-ruptable power supplies (UPS), cool-ing, internet connectivity and physical security are all looked after by the third party, so reducing the load on the SME. Big players in this market include the likes of Equinix, Savvis and Telehouse, although there are a growing number of smaller ones to choose from.

The hosted model optionA further option is the hosted model. A hosting supplier provides the facility, as with a co-locational provider, but also the IT equipment.

Hosting comes in several different flavours, many of which are moving towards a highly virtualised model based on cloud concepts. However, the one that has predominated up until now has been a simple model of an SME renting IT equipment that generally includes an operating sys-tem (usually Windows or Linux) from a hosting provider on to which they can load their applications.

In this model, the host provides support for the facility, the equip-ment and the operating system – the SME has responsibility only for the application itself. The equipment being rented may be physical (an ac-tual server) or virtual (a defined amount of IT resources agreed with the provider).

Providers in this space include the likes of Memset, Rackspace, UK2 and 1&1, although many of these are also moving towards providing cloud options.

Hybrid outsourcing modelThe panel above gives an outline of the different cloud options available to an SME. However, it is rare for the SME to choose one against the others, rather the SME should decide what mix of options makes the most sense for its needs. Such a hybrid approach will provide the best overall support for the business.

Some internal applications may be best kept in-house or in a co-location facility, using external break/fix and systems management support to enable a highly available platform for the business. Some other applications may be better served through moving to a hosted or cloud model, whereas other (particularly new) functionality may be better served with a software as a service model.

Getting the mix right – and under-standing what this means at an over-all IT platform support level – is key to an effective IT platform for the business. But what does this mix en-tail – and can the SME manage the mix itself?

The role of the aggregatorThe SME may want to look for a relatively new beast in the outsourc-ing world – the aggregator. As more functionality becomes available via the cloud model, a major problem for the SME will be in bringing these functions together in a manner which supports the business in a flex-ible manner. The long-term aim of cloud computing is to provide small functional components that can be brought together as required in what are called “composite applications” – but this requires deep understanding of how the different functions need to interoperate, along with the capa-bility to integrate them all together in real time. This is best left to cloud providers themselves – some, such as Salesforce.com, will provide a platform for additional functions to be hosted alongside the main appli-cation and for these to be integrated reasonably simply. 

Others will provide basic func-tions, such as e-mail and collabora-tion capabilities, bringing other func-tions in as required from other cloud providers and carrying out such inte-gration work as is necessary. The ag-gregator becomes the main touch-point between the SME and all the outside providers – in effect, the “one throat to choke” should there be any problem with how the overall system operates. However, it is early days for this at the moment and SMEs looking to move to a hybrid outsourced model should ask their main cloud provider if they are capable of acting as an aggregator. ■

clive Longbottom is founder of Quocirca

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Trends in outsourcing deals for 2012Smaller services deals mean changing suppliers more often but higher margins for outsourcers, says Robert Morgan

Indian providers will start win-ning large-scale central govern-mental work in 2012 - effectively for the first time. Politically, this

will be very difficult but it will send the message that there are no sacred cows anymore. This will be balanced by new EU and US models leveling the battleground and competing head-on with offshore pricing with “on-shore” experience and expertise. This will be most noticeable in com-plex customer service centre technol-ogy and support.

Small deals change suppliersThe global downturn will increase the number of new deals done in 2012-2013 as clients find they cannot put decisions off any longer. This will extend to renew-ing existing contracts too. A record number of existing accounts will change hands as contracts come up for reletting. This phenomenon is unusual for outsourcing clients. Suppliers usually feel recompeting is mostly done for benchmarking purposes and take it for granted the account will not change from the incumbent.

Outsourcing is changing and not without consequence. Large deals have all but disappeared and deals now being signed are smaller, shorter and less complex than three years ago. Yet when viewing the service providers’ published annual or inter-im results, turnover ranges from me-

Outsourcing deals in 2012: A record number of existing accounts will change hands

diocre, (which, given the state of the world’s economy, is not bad), to the rip-roaringly excellent.

Convenience raises marginsStranger still, solid gross margins are still being achieved. A typical example would be Infosys, which achieved year-on-year growth of only 15.7% (most analysts predicted and expected 20% or greater growth), but a gross profit margin of 41.29%. IBM’s fourth quarter and year-end 2010 results show a gross margin of 49%, and current gross margins are 46.54%. Accenture’s fourth quar-ter, ended 31 August 2011, with an operating margin of 33.1%. Even a sleepy, under-capitalised provider such as Unisys reported a third-quar-ter 2011 gross profit margin of 27.9%. Clients had grown used to single digit profits from traditional service pro-

viders, so this truly illustrates why clients need to understand the causes of and why outsourcing is changing.

Outsourcing has and continues to adapt and morph as it responds to client and economic demands. How-ever, extending, amending or under-taking new deals no longer needs true executive sign-off. Usually it sits squarely in middle management and even procurement control. Today’s shorter contracts seldom contain major capital expenditure require-ments, which was previously a major reason to use players with deep pock-ets. However, even tier-one suppliers adapt fast and have learned that, in a bidding situation, they do not need to fully compensate for their scale and leverage advantages in a cut-throat way. Higher margins, up to double, are back.

The cost of sale for securing small-er deals is of course much higher pro-portionally, but this is now easily af-fordable. But surely sourcing services from the market is all about lower cost? Clients must now face up to the new world of “convenience sourc-ing” – you will not get best pricing for small parcels of work. Neither will you get real risk carrying for smaller work parcels, nor innovation beyond new technical whizz-bangs – clients no longer have the buying power they once did.

Decline in obligationsWhat are the other consequences of today’s appetite for convenience sourcing? Poorer contracts – most

without specialist legal or other advice – will lead to reduced, unen-forceable or non-existent contractual obligations and supplier liabilities. Typical examples today include:l Lack of measures and remedies for poor performance;l Mediocre attention to data protec-tion. Data protection is often given secondary consideration, but it is critical to prevent potential litigation and even reputational damage if it is handled badly;l Poorly defined exit responsibilities. This is a time bomb of hidden costs and future managerial distraction.

For middle management, conveni-ence sourcing absolutely solves very real issues by providing expert ser-vices under the client’s control, with only a minimum commitment. The short-term nature of convenience sourcing allows for “plug and play” replacement services where neces-sary. This convenience represents a double success for larger suppliers. They achieve higher margins with deals of little or no impact on their balance sheet, as they do not take on people, assets or risk profiles. No wonder suppliers are unconcerned by the lack of large deals. So are to-day’s outsourced clients still capable of securing a good flexible deal? Yes. But will they secure the best com-mercial deal, with a risk-bearing and innovative partner? Without support, the evidence suggests otherwise. ■

Robert Morgan is director of outsourcing advisory firm Burnt oak Partners

CW Buyer’s guideoutsourCing

l New entrants in the form of specialists – say, in supply logistics – coming to market with software fully developed and integral to solution packages. This decreases time to market, business risks and costs.

l UK government will introduce an equity ownership model for shared services and large outsourcing deals which will become replicable in the private sector. The phenom-

enon will suit smaller, EU-based companies as larger US and German conglomerates struggle with explaining “part-ownership” to analysts and shareholders.

l The failure of a major supplier with a large European portfolio and the scaling back of a smaller global player. Suppliers will consolidate, but there will be an expansion of new market entrants.

Other outsourcing trends for 2012