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Table of Contents

Predictions for 2005: Captives the Next Big Story in Offshoring

The Top 10 Outsourcing Events in 2004 and What They Mean

New Outsourcing Risks in 2005 and How to Mitigate Them

What's New in BPO

What to Expect This Year in the Leading BPO Processes

Cracking the Code to Check 21

Guidelines For IT Management: Planning for Offshore Outsourcing

In 2004, outsourcing became a household word. Offshoring caught on at mach speed. What could top that? Here's what I predict will happen this year in the most exciting corner of the business world.

Offshore Still the Big Story

Offshore really gained momentum in 2004. This year I predict that momentum will continue as offshore outsourcing spills out from its initial beachhead in applications maintenance and development (ADM) to everything!

The offshore argument is incontrovertible: companies are not only willing but eager to offshore ADM when they can capture savings of between 30-50 percent. The same arguments hold true as offshore BPO matures. I posit offshoring dramatically increased the market for outsourcing because of the magnitude of the savings now possible.

I see two new trends in the offshore outsourcing story this year. The first is the cannibalization of work. Three years ago work buyers outsourced to a supplier stayed at home. Today much of that work ends up offshore. Offshore has already cannibalized the ADM space. I see human resources (HR), including benefits administration, and finance and accounting (F&A) as the next feeding grounds.

There's even cannibalization in the IT infrastructure space. For example, buyers are successfully moving the support of their servers and networks offshore.

This trend reduced revenues for suppliers. Now they have to sell more deals to keep their existing revenue bases intact.

But the big news in offshore outsourcing is the growth of the captives, organizations owned and operated in a foreign country by a parent firm. The offshore workers are employees of the parent company, not an outsourcing supplier. I see buyers hiring a supplier and setting up their own captives. Yes, companies want to do both. The outsourcing produces gains immediately. Captives take longer to build and nurture. But they provide their own benefits, especially if the company has intellectual property it does not want to share with a supplier. I predict next year at this time we will be surprised about the growth rate of captive organizations in 2005.

Finally, I think India will maintain its dominance in the offshore market in 2005. But I think buyers worry about putting all their eggs in one basket. I predict other areas like China, the Czech Republic, and the Philippines will grow their market share as well this year.

BPO Forges On Apace

Every year I predict the BPO market will grow. And every year I've been right! (Now if I only could predict interest rates...) Actually, BPO growth has been easy to predict because it not only generates cost savings, a basic requirement in the recent down economies, but also because of the business benefits it can unlock. Buyers have seen the success of BPO offerings in the marketplace and are willing to bundle IT with their concomitant processes to extract even more value from their outsourcing endeavors.

Last year human resources outsourcing (HRO) captured all the headlines. This year I think HRO will become an old story. 2005 will be the year of finance and accounting outsourcing (FAO). I think FAO will gain real traction this year and may grow as much as 35 percent.

Last year the new kid on the BPO block was purchasing. I think logistics needs a couple of years before it enjoys the kind of dramatic growth that its more mature cousins have experienced. But I maintain this year companies will begin to realize the power of outsourcing their supply chain process. I predict a 50 percent increase in logistics outsourcing deals--say 20 deals this year, up from 10.

VoIP Adds Market Growth to ITO

Exciting changes even appeared in the most mature area of outsourcing, ITO. VoIP (voice over Internet protocol), which combines data networks with telecom networks, is adding new activity to the ITO sector. Since VoIP is a nascent outsourcing offering, I expect to see competition for the creation of technology standards for the process.

This competition will create a surge of new offerings in this space, which may translate into more outsourcing activity in 2005 since I believe some companies will chose to outsource their move to VoIP rather than attempt to do it themselves.

This year I suspect we will see an acceleration of the trend of manufacturers entering into the outsourcing arena and becoming successful. For example, I predict Dell, IBM, and HP will carve out the biggest pieces of the ITO pie. These manufacturers can still thrive operating in this mature market because they can also make money on the hardware as well as services. I predict many of the other ITO suppliers may struggle.

Put on your seat belts because 2005 is sure to be a wild ride.

Publish Date: January 2005

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Copyright © 2005 - Everest Partners, L.P.

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