Outsourcing Grows as Economy Slows

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Outsourcing Grows as Economy Slows
By Beth Ellyn Rosenthal, Editor

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money from the sky With the threat of Y2K glitches, many companies delayed outsourcing commitments during the final half of 1999. But companies returned to outsourcing in 2000. Megadeals lit up the landscape, says Bob Pryor, vice president of Cap Gemini Ernst & Young (CGEY) and head of its Global Operate - Americas outsourcing business in the U.S.

Pryor, who is based in the CGEY Dallas office, says the economy's slowdown at the end of last year (based on the leading economic indicators) forced companies to focus on how to drive profitability in a time of slower sales growth. Growth and abundance tend to hide problems. When growth stops, companies have to get back to basics. Pryor predicts the current economic conditions "will drive a tremendous amount of outsourcing business."

Moreover, the CGEY executive predicts investment capital will become tighter this year. Capital projects competing for limited dollars will also drive companies to outsource projects they don't want to fund, he observes.

That said, IT will be a "significant part of the capital budget of corporate America," predicts Pryor. Last year companies wrote checks in a "frenzy of spending" with less rigorous financial analysis than in prior years. Today, companies are being more discerning. Pryor views that caution as a good sign.

Outsourcing Must Continually Add Value

The outsourcing executive says an increasing number of companies are coming to CGEY who want to outsource all their non-core processes. Supply chain management for business to business (B2B) exchanges and ecommerce are two examples. Pryor says they want the vendor "to take care of all the components." In the past, it was more common for buyers to tell CGEY "take over the IT function" only. "Now buyers view outsourcing as a path to corporate transformation. And rightly so," he adds.

In addition, buyers are expecting vendors like CGEY to continually add value over the life of the contract, which requires both parties to build a workable long term relationship. The rapidly changing IT world is one reason for this relationship approach. Pryor says that after the supplier completes a project, there is a short period of stability. Then the world changes again, "putting us on the hook to add more value," he explains.

Another change is that buyers are asking CGEY to take over the on-going support of enterprise resource planning (ERP) systems. "There's a blurring between system integration and implementation and outsourcing," says Pryor. Buyers are looking to CGEY to ensure their ERP systems are part of their overall B2B strategies, for example.

Pryor describes application service providers (ASP) as vendors "with a compelling offering - speed, flexibility and scalability at a reduced cost." He believes the ASP model will grow more important this year "because the reality is people want a 'plug-and-play' infrastructure," he says.

In addition, he believes some of the ASP platforms will become more customized, especially for Web-enabled and ERP applications.

Lessons from the Outsourcing Primer:

Outsourcing will grow this year, because a slower economy will cause companies to put more emphasis on business basics like profitability.
Companies used to outsource their IT departments only. Now they are interested in outsourcing every non-core process.
Buyers expect vendors to continue to add value over the life of the contract. Constantly changing IT developments are the major reason.
Buyers are asking vendors to take over the ongoing maintenance of ERP systems.
Buyers are looking to outsourcing to transform their companies.

Publish Date: January 2001

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