With FAO providers cropping up on every street corner, the pressure is on for companies to distinguish themselves and their offerings to stay competitive.

by David I. Sheinfeld

There was a time—and it was not so long ago—when outsourcing was reserved for the well-known name companies in the marketplace. After Y2K and the spending spree corporate America embarked on, it became clear that many functions could be handled more efficiently and less expensively by having someone else do the work. We saw contracts worth billions of dollars being awarded to the likes of IBM and EDS.

As the market grew, more companies ventured into the outsourcing space, and IBM and EDS were joined by such firms as Accenture, ACS, CSC, and HP. Together these six companies became known as the Big Six of outsourcing companies. They held a substantial part of the outsourcing market until just a short few years ago. How things have changed in just a few years.

The latest reports showing dollar volume, growth, and the number of outsourcers seem to question whether the term Big Six is even applicable today. Duirng the past few years many other companies, especially those located outside the U.S. and whose global delivery model has gained traction, have diluted the market share of the Big Six.

A report previously published by TPI, one of the largest sourcing advisory firms, states that contracts worth more than $100 billion dollars were coming due in 2006 and 2007 with almost 50 percent of those dollars concentrated in two companies: IBM and EDS. Now, there is a whole group of new provders coming up the chain to offer the same services and solutions as the larger companies. As a result of the many newcomers and the field bursting with new players, outsourcing has become a commodity and is experiencing the same pressures many other commodities go through as the market players mature and become well established.

As in any commodity business, the more choices you have, the more pressure the commodity faces in the market. The outsourcing industry is in the midst of a sea of changes. The client is more knowledgeable today than in the late 1990s when those original contracts were signed. The client appears not as concerned with outsourcing and has a more expanded view of what the outsourcer should provide, and it’s not just cost savings. The client is requesting more in terms of value-added services and solutions as part of the BPO transaction. The client is also avoiding giving its business to just one provider and is splitting up the contract to more than one vendor. The outcome of all of this is more choices, more competition and, therefore, greater price pressures on organizations providing the services.

The offering the outsourcer is pursuing will determine what services are offered and the price for them. For example, call center services and their pricing may be more generic and the processes more uniform than finance and accounting or human resource processes. Each specific area requires a particular expertise not only on the human side but also the technology side. Some areas have the potential for large transition and start-up costs that are likely to cause greater margin pressures during the life of the agreement.

As clients show more inclination to break up the contract scope and use more than one provider, there are fewer margin dollars and less opportunity to recoup any start-up losses that occur during the term of the contract. Furthermore, with smaller contracts in place, there is a greater emphasis by the outsourcing company to avoid transition and start-up costs, as the ability to recoup those costs becomes that much more difficult. The new contracts may also require more services or other value-added solutions that increase not only the requirements under the terms of the agreement but also the risk to
perform. Thus, the provider needs to be prepared to give more for less.

In many cases the client will look for an offering that will include both solutions and services, especially in the case of a new or amended agreement. While this may not include an ERP system or specific software that would increase the start-up cost substantially, it does include specific solutions that could replace a legacy client system that is outdated and in need of upgrades.

The requests for value-add solutions and technology will only grow as both outsourcer and client recognize their value to the marketplace. Outsourcers should be prepared to address such requests in earnest and be able to provide something to the client that is complementary to their ongoing business and can fulfill the requirements surrounding the BPO process.

To accomplish this, the outsourcer must be willing to invest in solutions it can offer to the client alongside the services model. Although the outsourcing company may not want to stray too far from its core model of providing cost-effective services, new solutions embedded within the outsourcer can be a source of revenue or a differentiating factor with the client. An outsourcer capable of providing solutions could also provide solutions at a much lower cost than if the client did it themselves with an outside solutions provider.

This does not include creating the infrastructure to run the solution, which can cost many times that of the solution. Some BPO providers have seen this trend and are now acquiring or investing in the necessary IP and technology to provide solutions from within, without having to go to outside software companies. Not only do they get the product ready to complement the BPO market, but they also acquire the expertise and knowledge base necessary to do selected custom development for the client if needed.

The right circumstance might also lead to another revenue source: a build-and-run model for solutions that would be specific for the client yet work with the service provider whether that provider is ultimately offshore, near-shore or onshore. BPO providers should not solely rely on applications currently in the marketplace from the established providers such as SAP, Oracle, Microsoft, and others when there are specific, robust solutions already in the market that can provide similar functionality for the client.

Success in the BPO market is achieved by being timely and cost-effective, and an end-to-end solution that accomplishes that is one that the market and client should embrace.

As a number of existing contracts terminate over the next couple of years and those clients view the competitive landscape, price pressures are greater than ever before. Outsourcing providers need to wake up to the fact that they are selling a commodity subject to the competitive pressures a commodity brings. As with any other business, there is also the pressure to come up with new products and services. Companies must not only keep what they have, but also attain new business.

To do this, a company has to distinguish itself and its offerings. Labor arbitrage will not be the only way to grow the business. While the cost of labor will remain an integral part of the value proposition of any provider, it will not be deciding factor with so many providers waving the labor flag and boasting global delivery models. As the number of outsourcers continues to grow, whether they can attain the profits needed to justify the start-up costs,
transition costs, or the capital expenditures remains to be seen. What we do know is that the choices are plentiful in the outsourcing world, and providers need to be willing and able to provide innovative products along with the labor savings to meet the future needs of the marketplace and stay competitive.

David Sheinfeld is with Becton Schantz , Inc., an established SaaS provider and provider of outsourced solutions, as well as application services in the consumer products marketplace. He is also a managing director of Horizon Business Advisors, LLC, which concentrates on management, strategy, and merchant banking. He can be reached at dsheinfeld@bectonschantz.com or dsheinfeld @horizonbusinessadvisors.com.