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Outsourcing Update

May 2, 2008

I spent time this week at the TPI conference in Chicago. The event attracted record numbers, illustrating the company’s continued growth.

In the opening session, TPI exceutives outlined some current industry statistics – for example, in 2007 there were 487 commercial outsourcing deals awarded in the US, worth a total $80.4bn. There are currently 2,902 active contracts and TPI recorded 113 providers who in 2007 won at least one award.

The provider market continues to grow – perhaps surprisingly, given the struggle that many face in maintaining acceptable margins. This has resulted in major shifts in market share – for example, over the last two years, the share of deals won by ‘the big 6’ is reported to have dropped from 45% to 21%. European providers have seen small growth, as have the Indian ‘majors’, but the real switch has been to ‘other’ – up from 38% to 54%.

With such volatility and price pressure, quality seems bound to suffer. And certainly the challenges of achieving innovation and value-add were high among delegate concerns. TPI has often been criticized for its ‘aggressive’ negotiations and the extent to which these sour the atmosphere for execution. But the evidence at this event was quite the opposite; I heard consistent appeals from TPI speakers for buyers to think and work more collaboratively. Indeed, the fact that I had been invited to speak (in two sessions) demonstrated to me their seriousness in trying to change the atmosphere of many outsourcing engagements.

While there is no doubt that some buyers, and their selected advisors, continue to use aggressive, risk averse approaches and focus on ‘commoditization’, the stories I heard suggest that many providers are guilty of similar behavior. And those that behave well in negotiation often change their spots when it comes to on-going contract management, their focus turning to margin recovery rather than relationship-building.

The industry is strong in terms of revenue, and it seems clear to me that there are real opportunities for providers who take a new and more principled approach to establish competitive advantage. It is up to them to show that they can shift their marketing to demonstrate how trust and collaboration will generate superior outcomes. To do this, they must also show their ability to offer agreements and governance structures that really do provide a platform for innovation and added value.

  1. Does margin recovery (when it’s detrimental to collaboration) represent a provider’s unrealistic profit expectation?

    Will outsourced service providers continue getting current margins, or is there a migration towards the lower end of profitability? (i.e. margins of software developers compared to supermarkets).

  2. Wanton Smithers permalink

    Hi, I just wanted to remind everyone that the efficiency that is advocated and measured in a Taylorian sense by accountants is incompatible with innovation and long term growth. We want to outsource and make everything so efficient, whether by a man-hour culture or by a price on delivery culture is immaterial.
    I just visited South Korea. There you see real conglomerates that do everything, they are not like Ford just making cars but they do everything. To us in the West who are not as educated (accountants, lawyers) that seems to be inefficient. However, consider that science and technology is becoming interdisciplinary. Placing people in boxes and saying “this is not core business” KILLS OFF innovation and opportunities. A staggering statistic for me was that out of the 250,000 employees in Samsung, 1 in 4 has a PhD!!! this is in spite of them selling 100 billion USD of stuff and doing 4 billion USD in R&D

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