In today?s outsourcing game, variety is the spice of life. Gone are the days when clients would award contracts worth hundreds of millions of dollars to a single vendor. As the global outsourcing ecosystem develops, companies realize that their options are expanding.
A recent study conducted by UK-based analyst firm Datamonitor and global outsourcing advisory company Everest Group show that for the past three quarters, outsourcing contracts worldwide have steadily declined in dollar value. In the first quarter of 2005 alone, the average value of information technology services and business process outsourcing (BPO) contracts fell by 18 percent to $68.9 million.
The study attributed the steady drop to the rise of multi-sourcing wherein a client farms out its requirements to a number of vendors rather than to a single service provider. Although the total value of outsourcing contracts also dipped from US$36.4 billion in 2004 to $31.4 billion this year, the number of contracts increased (from 435 to 456), which suggests that clients are signing smaller, more focused outsourcing deals.
MITIGATING RISKS
The trend towards multi-sourcing shows that clients are getting more experience managing their outsourcing contracts and dealing with vendors, observed Lauro Vives, managing partner for global IT consultancy firm XMG Inc.
"Although our benchmark study still shows that the cost of managing multiple outsourcers is 36 percent higher than those of managing one single outsourcer, clients feel that the added costs of managing multi-sourcing contracts is worth the risk if they can mitigate the risks of outsourcing to a single vendor," Vives explained in his e-mail response to Computerworld Philippines.
For most single-sourced outsourcing deals, Vives pointed out that the gap between customer expectations and actual service levels. "Clients who are nearing the term of their single-sourced contracts are starting to realize that new or improved services, sometimes at increased cost, are falling short of expectations," he said.
The call center sector, in particular, where the Philippines has established a niche over the last three to four years, is starting to see multi-sourcing as a trend, although local players cannot readily divulge the actual value of their more recent deals to determine if contracts are indeed shrinking.
The trend towards multi-sourcing applies to the local call center industry, said Danilo Reyes, country manager for ClientLogic Philippines, which has around 2,000 agents doing in-bound calls for US clients in its Pasig City office. It also opened a facility in Baguio City early this year.
"I think that it cannot be generalized across the whole outsourcing sector," he noted. "The call center sector is experiencing this trend as the clients become more experienced and sophisticated."
Reyes expects multi-sourcing to continue as clients opt for "best of breed" services and mitigate their risks. "I think it is advantageous to the Philippines because it further develops players, thus expanding and improving the call center sector in general."
GROWING MARKET
Outsourcing deals are getting smaller in dollar value although this does not necessarily equate to companies drastically reducing their budgets. Instead, companies are trying to squeeze the most out of their budgets to hire the best services they can afford.
Also, less lucrative deals may indicate that clients, not budgets, are getting smaller. The Datamonitor/Everest study found that majority of buyers of HRO (human resource operations) services, for example, are in the mid to large segment with between 10,000 and 25,000 employees rather than mega corporations with around 50,000 employees.
Local company SPI Technologies, which provides BPO services to US clients, is starting to see this significant market shift. SPI?s recent deals represent a balance between enterprise clients and mid-sized outsourcers, said SPI chairman Ramanan Raghavedran, who is also managing partner at TH Lee Putnam, a US-based venture capitalist which bought into SPI last year.
Raghavedran expects SPI to get more clients from smaller companies that are looking to delve into outsourcing. "The mid-market (client base) is growing. For us, this means the pool of work available is growing as well," said Raghavedran in an interview at SPI?s corporate headquarters in Parañaque City.
The rise of multi-sourcing somehow levels the playing field for Philippine service providers because clients are spreading their budgets and are hiring multiple vendors to manage different requirements and reduce the risk of bad service from a single vendor.
ClientLogic?s Reyes believes that the only way for the Philippines to compete with the rest of the outsourcing ecosystem is for local players like his company to strive in delivering the best possible service.
"There is no substitute for having excellent execution in the delivery of services," he stressed. "This is the greatest selling tool. Even if they are providing service to a small client, their standards should be equal to, if not greater than, the best practices around."