Contributors

Light at the End of the Tunnel?

With the prospect for renewed growth in 2010, the Great Recession might give way to the Great Restructuring.

 
By Dharman Shetty
 
As the cold days of winter near and 2009 comes to an end, many are hoping for a better year in 2010. The global economic meltdown impacted most businesses, including the outsourcing industry. Many economists predict a slow recovery, with some warning of a double-dip recession. Some recovery has occurred in the financial markets. The credit markets have relaxed somewhat due to governmental interventions, and the money flow has started. The hope is that this will rekindle business growth in 2010. 
 
One would have assumed that the economic pressures would have prompted businesses to outsource more; clearly this did not happen. The economic downturn forced businesses to focus on revenue and cash preservation. Businesses avoided initiatives that required large upfront investments or major transition efforts. Businesses delayed outsourcing initiatives that involved significant transition, or they opted for reduced scope with more tactical outsourcing engagements that delivered immediate value.
 
As the recovery continues, businesses will want to get back on the growth track. However, after a year of severe workforce reductions, businesses are unlikely to significantly increase headcount, especially in the developed economies. Instead, they are more likely to externally source non-core services. The credit crunch has forced businesses to re-think their asset ownership strategy. Businesses are opening up to the concept of leasing/renting IT hardware and software. With continued pressure to reduce capital outlay, businesses are evaluating solution options that can be deployed quickly and without having to justify investments to their boards.  One can expect this shift toward a variable expense model to continue through the year 2010, which bodes well for the outsourcing industry, especially for those providers offering SaaS, on-demand ITO, and BPO services. 
 
The HRO market can expect a better 2010—especially those in the RPO and talent management spaces.  It will not be a return to the days when businesses entered into large, multi-process transformational HR outsourcing. Expect businesses to be wary of the transformational projects after the not-so-spectacular ROIs from many such initiatives in the past. The businesses are likely to opt for point solutions that can help achieve specific operational goals.   
 
HR outsourcing will still involve bundling of related processes, but it will not be as broad based as in the past.  Businesses will be more selective about non-transactional functions and are likely to go with specialized service providers. There will still be a few large HRO deals; however, many of these deals will be driven by customer-specific business situations rather than any industry trend. 
 
Businesses are looking for flexibility in solution options, and would prefer to source the services from a single provider or a select set of providers. HR service providers who offer customers a choice of services and hybrid deployment models (AMS, SaaS, transaction processing, full BPO, on-premise, on-demand) will likely see much more traction in 2010—especially if the services are delivered using single, integrated industry standard technology platforms.  
 
2010 will also see restructuring of existing outsourcing contracts and rationalization of outsourcing relationships.  Multinational companies having multiple outsourcing relationships for certain functions—for example, payroll—will likely consolidate with a global provider who can service their global needs.  At the same time, companies having global multi-process HRO deals might de-scope certain functions, such as recruitment, and enter into localized sourcing relationships with specialized service providers that have local market expertise. 
 
The past year has been tough on many. We expect market consolidation with service providers either to fold up or recommit themselves to certain processes or business segments based on their traditional core strengths. With organic growth slow to come by for some global BPO providers, they are likely to be on the acquisition trail for high-growth, specialized service providers and strong regional HRO providers as they try to maintain their growth.
 
Overall, we expect 2010 to be a better year for the HRO industry.  Capex-free service providers will gain traction much faster.  Service providers with integrated end-to-end solutions, offering flexible deployment options, and demonstrating the ability to leverage scale via best-practice, standards-based platforms will see more successes. Last, with most of the growth expected to be in developing countries such as China, India, Brazil, and Mexico, HR service providers with a strong presence in those regions can expect to see a faster revival in demand.
 
 
Dharman Shetty, dharman.shetty@sap.com, is director global BPO strategy, SAP.
 

 
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