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Issue of February 2007
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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 domains

    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, Xi’an, 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 resource crunch

    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 2007

    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 strong demand.

  • 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 doesn’t make sense. To cash in on the opportunities, British Airways sold its captive unit in 2002, while Capgemini bought out Unilever’s 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 delivery.

  • 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 India’s stature as the world’s 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.

 
     
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