Analysts Forrester explains how the reasons for outsourcing are changing

The reasons why organisations engage in outsourcing relationships are changing, said Forrester at the firm’s Services and Sourcing Forum 2007. This is because those involved are beginning to understand its real value.

Stephanie Moore, Forrester vice president and principal analyst, said “Today people are realising that process improvement, standardisation, innovation or transformation benefits are much more valuable than pure cost savings.”

Malcolm Frank, Cognizant vice president of marketing and strategy, said 80 per cent of an average IT organisation’s budget is caught up in “dead money,” such as spending on maintenance and infrastructure, but firms are trying to change this profile by outsourcing to free up the budget to drive new capability for users. Frank pointed to the chief information officer at HP who has committed to transform the 80/20 rule to 20/80.

“Offshoring is no longer about just providing operational efficiencies, but is engaged to create process level efficiencies and effectiveness at the application level,” Frank said, adding that this is a “clear breakthrough.”

Moore said the need to innovate is as important as cutting costs in industries such as retail and media, and advised conference attendees to look for “deep, vertical expertise” when looking for innovation in a service provider.

Moore pointed to companies like IBM that invest millions of dollars in research and development as one avenue for innovation. In a later discussion, Moore also mentioned the Indian provider Infosys’ programme; SETlabs, which has 500 people in the group that are not sent out on client projects.

“The group selects industries or selects problems in industries and then tries to create solutions using the most bleeding edge and advanced technologies and this way Infosys can move up the stack and create more value,” Moore said.

“This is unusual for IT service providers,” Moore said, and generally when an organisation requires innovation, they will need to request it.

Frank explained that in the competitive bids Cognizant has been involved in, all the providers have been thought capable of delivering high quality at a good price. “Now the hallmark of the relationship is can you help me move the business forward, whether the provider has certain domain insights, and how they can help with the innovation agenda.

More that 50 per cent of Cognizant’s work is now spent “doing real domain and process issues,” said Frank.

Frank said “offshoring” is likely to disappear as a term, and pointed to the fact that Accenture has more Indian than American employees in its business, and that IBM is the largest private employer in India, with 70 to 80 thousand Indian associates. “When those multi national firms have moved to that footprint, it is just sourcing for the industry,” Frank added.

During this year’s National Outsourcing Association Summit, Adrian Quayle, Gartner vice-president, also discussed key trends he saw developing in the outsourcing market.

“The service provider market is changing dramatically as the service providers’ move to a global delivery model, whereas in the past the focus was around offshore and onshore structures,” Quayle said.

“There is a convergence happening between offshore providers and traditional service providers…occurring through big deal pursuits, the range of services on offer and their global coverage area,” Quayle said, pointing to the headquarters of Fujitsu in Tokyo, Capgemini in Paris and TCS in Mumbai.