THOLONS announces services globalisation trends for 2007
Services globalisation is now a key strategic imperative for
successful enterprises and will be the single most important factor shaping
how services are developed and delivered across the globe. Globalisation has
evolved from individual companies leveraging a few resources offshore to countries
now vying to be the next destination for technology and business process outsourcing.
The 10 key future trends for 2007 are:
- SMEs driven by private equity investors will become
significant participants in services globalisation.
Tholons report states that the year 2007 will be that of SMEs, who will
play a significant role in the services globalisation arena. Anticipating
the next wave, Private Equity (PE) investors, who are flush with funds,
are all set to power the SMEs by investing up to $5 billion in the Indian
market to fund the expansion plans of Business Process Outsourcing (BPO)
and Knowledge Process Outsourcing (KPO) firms.
- Firms will adopt the Cities of Excellence
model, sourcing services from the best location for respective ITO and BPO
Cities such as Prague, Halifax, Budapest, Warsaw, Pune, and Bucharest
are already centers for outsourcing but they are becoming more expensive
and less differentiated. As a result, other cities such as Bratislava, Ho
Chi Minh City, Kolkata, Xian, Buenos Aires, Krakow, Colombo, Dubai
and Sofia are on their way to becoming centers of outsourcing in 2007.
- Multi-sourcing will dominate as mega-deals will be
sourced to a mix of Tier I and best of breed Tier II service providers
Many of the large contracts that are up for renewal in 2007 will be restructured
considering multi-sourcing. Organisations will have a preferred set of service
providers comprised of large tier I and best of breed tier II
providers and niche tier III suppliers. The number of small to medium-sized
contracts (those worth $50-$200 million) will see a significant increase
when compared to previous years. The trend now is toward more contracts
that are smaller in size with specific function, which will in turn lead
to multiple providers.
- ITO and BPO growth will be supply constrained in an
extremely strong demand market
Due to changing market dynamism service providers with predominantly onshore
delivery capabilities are facing significant challenges because clients
now want a significant part of their outsourcing to be handled from offshore
locations. Service providers would start executing starkly different strategies
to emerge as leading global service providers. Onshore service providers
will continue to expand globally in their search for cost optimisation and
to cater to the huge demand, while offshore service providers will grow
their business both organically and inorganically. And finally, market leaders
in the industry will be shaped by their execution capabilities and their
ability to scale up to meet the massive demand of services globalisation.
- Globally service providers will witness a significant
In the coming years, India, the Philippines and China will face shortage
of talent pool as there would be a significant increase for ITO and BPO
services globally. The emergence of more players in this arena would give
rise to wage inflation and higher attrition rate.
- Engineering Services, R&D, ERP, Infrastructure
Management, Product Development and Healthcare will see increased traction
In the rapidly expanding ITO and BPO industry, there are a few sectors
that are expanding more rapidly than others. These are sectors that will
witness growth rates beyond the industry average. Engineering and R&D
services specifically will form a significant part of many service providers
revenues and will also contribute significantly to the total outsourcing
market. Adoption of globalisation in Europe will accelerate resulting in
- Captives will see heightened activity in 2007, with
parent companies considering spin-offs to cash out
Of the estimated 700 BPO companies in India and Philippines, 65 percent
are captive and 35 percent are third-party vendors. More captives will be
established in 2007 with the demand from the global SME segment increasing.
This trend will continue in niche areas for reasons of skill availability,
intellectual property and information security issues.
Over the years, many suppliers have developed skill sets in general processes
and improved upon them. One reason for multinational companies to sell is
that there are big global outsourcing firms that can now easily handle their
needs, so maintaining an in-house unit simply doesnt make sense. To
cash in on the opportunities, British Airways sold its captive unit in 2002,
while Capgemini bought out Unilevers majority stake in Indigo, a captive
finance and accounting services BPO. Similar deals are in pipeline.
- Offshoring of customer-facing processes will slow down,
and some may move back onshore or nearshore
During 2007, Tholons foresees a trend where companies that have tasted
success in moving higher end processes overseas will try to increase the
speed of outsourcing for these services.
Many companies will move beyond the hype cycle that surrounded globalisation
and start rationalisation of their portfolios for onshore offshore
- Tier II and Tier III service providers will spread
their global footprint acquisitions
For the last few years, most of the Tier-I offshore service providers
have been rapidly expanding globally. In 2007, tier-II and tier-III service
providers will aggressively scout to expand inorganically and will look
at expanding their services to countries outside their home base.
2007 will see service providers undertaking M&A to acquire delivery
capabilities, specifically in complimentary markets such as the Philippines,
Vietnam and the emerging economies of Eastern Europe. Service providers
from these economies will actively make acquisitions in India as India emerges
as a must have destination for client market (US, Europe etc.) access.
India will continue to be the leading destination for ITO and BPO. Philippines
will be a strong but a distant second while China will trail behind for
next several years.
While 2007 will see Indias stature as the worlds back office
growing, the Philippines will evolve as the preferred destination for offshoring
customer-facing jobs based on the benefits of cost reduction, manpower availability,
and quality that it brings to global organisations. Some important factors
that might work in favor of Philippines include factors such as a committed
and highly trainable workforce, strong cultural affinity with the west,
and the expansion of existing BPO firms.
China has challenges with english language fluency, cultural implications
and Intellectual Property Rights (IPR). They have a lot of work to do to
catch up, so it will be several years before Chinese services companies
make their mark on the global ITO and BPO landscape.