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Recovery chronicles: predictions for 2011

"Having focussed on cost cutting for the past 24months, businesses will evolve new strategies to leverage the recovery. A tweaked sourcing strategy will be a part of this newdirection at most companies."

Deepak Bharathan
Outsourcing Magazine
1 February 2011

As the United States shifts gears to recovery mode, unemployment still hovers around 10 per cent, which makes the current recovery markedly different from earlier recoveries. 

While the US household savings rate continues to trend higher to cross 5.7 per cent, the 2010 holiday season brought a burst of consumer spending driven by pent-up demand and deals from retailers. The holiday sales are expected to increase by over 10 per cent as 60;as compared to 2009. As consumer spending stabilises, businesses will have to remain nimble to do business planning around this recovery.

Having focussed on cost cutting for the past 24 months, businesses will evolve new strategies to leverage the recovery. A tweaked sourcing strategy will be a part of this new direction at most companies.

Value – not cost 

“Value” will rule 2011 sourcing negotiations – more than ever. While US businesses were focussed on cost savings in their discussions with sourcing partners over the last two years, moving the relationship to deliver on high-value services and true partnering to meet business objectives and share market risk will come to forefront.

Also, some companies will explore the option of insourcing certain outsourced aspects of their business. Cost cutting focus has forced many short-term deals in the market focused on reducing operational costs. As business conditions – which includes the taxation regime in the US that has recently been given a great level of clarity – improve, companies will explore the option of terminating some of these sourcing deals to negotiate better long term deals and explore options to bring back into fold some outsourced elements as a part of long-term strategic planning for market competitiveness.

Prediction 1: Re-negotiation of existing deals:

If you are the Chief Procurement Officer of a company, especially one which has more than US$1 million deals with a single supplier, you should look at the deal portfolio very carefully – your counterpart at your competitor is doing this. 

As cost cutting and capital preservation took hold over global business psyche, companies negotiating sourcing deals focus on these elements.

While these deals have given much needed operational cost savings, there is a good chance that factors like long term growth objectives, risk sharing and building sustainable partnerships have not been in the forefront of such deal making. As businesses evaluate the changing economic conditions around them, some of these deals will be reviewed for financial and strategic fit. So re-negotiation activity will pick up towards the middle of the year.

Bottom-line: This is an opportunity for clients to review and enhance sourcing relationships, but vendors should take this as an opportunity to build stronger and deeper ties with their clients.

Prediction 2: Rise of smaller players:

If smaller sourcing partners have not been on your company’s preferred supplier list because they are “inherently riskier” – it is time to rethink your vendor strategy. Enterprising sourcing companies have sprung up all across the globe leveraging the experience built by the larger entities in their respective geography.

While these smaller companies do not have the bench strength of the larger players, they are leaner and hungrier for business – and have managed to attract talent and clients by consistently over-delivering.

Many companies will rebalance their vendor portfolio to include some smaller players in the mix. For midsized clients, smaller sourcing partners offer better account attention and more creative business options like build-operate transfer and dedicated offshore centres with improving capabilities to understand and manage risk from sourcing, share of business to smaller and niche players is bound to increase in the near future.

Bottom-line: Inclusion of smaller players creates a competitive landscape for vendors in your company’s portfolio and is an opportunity to explore more flexible options of doing business.

Prediction 3: Transformational sourcing goes mainstream:

Strategic sourcing beyond the Information Technology domain has been long waiting as an obvious next step in the evolution of sourcing relationships. But, only few relationships have bundled services like Business Process Outsourcing, Task-based outsourcing and Engineering functions into comprehensive sourcing contracts. Transformational sourcing is an idea whose time has finally come.  

Large transformational sourcing relationships often had the risk of over-reliance on a single service provider in the past. As relationships and capabilities of both sourcing providers and companies have matured – this is no longer true. 

With improving maturity of companies for vendor management and increasing sophistication of vendors to handle multi-tiered deals, companies can explore the potential of organisational transformation with the help of partners.  

Instead of piecemeal sourcing deals, companies will integrate sourcing of functional areas like HR, Finance and Information Technology with business process outsourcing under a wider sourcing umbrella. Progressive steps in this direction will accelerate in 2011. 

Bottom-line: A multi-sourced environment which leverages a global delivery model across a wide array of functional and technical services is the next step in the evolution of the sourcing industry.

While external factors like the pace of recovery and regulatory regimes will continue to heavily influence the sourcing industry in the near term, new business models which enable clients and vendors to build better shared risk arrangements will lead to more creative deal making in the New Year.

Here’s one prediction that is a certainty: we will have an exciting year ahead in this industry!

Deepak Bharathan is an outsourcing expert at PA Consulting Group, a global strategy and management consulting firm.

To visit PA's shared services and outsourcing pages, click here.

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