May 5, 2011
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing by Jan Erik Aase for Sourcing & Vendor Management Professionals
Making Leaders Successful Every Day
For Sourcing & Vendor Management Professionals
May 5, 2011
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing
Looking To 2011 And Beyond, Both Focus On Increasing Business Alignment by Jan Erik Aase with Chris Andrews and Mark Grannan
Exec utive S u mma ry The offshore outsourcing trend and practice is due for transformation. The proliferation of “as-a-service” offerings and trends related to mobility, social tools, and sustainability make demands for innovative technology partners more important than ever. Yet these trends create new challenges for sourcing and vendor management (SVM) professionals, who must drastically change the way they work with offshore providers. Most North American and European clients have invested in three or four key offshore relationships and one or two key MNC relationships. Yet they must now re-evaluate these relationships to determine if their vendors are positioned to meet their needs beyond 2011. Our recent interviews with clients and vendors confirm that leading offshore vendors are making real progress on their attempts to close the gap with their larger competition. Yet clients’ concerns about changing business objectives, the proliferation of “as-a-service” offerings, and demand for deep industry specialization, suggest only the most collaborative, innovative, and trusted partners will succeed.
ta bl e of Co n te nts 2 Clients Are Rethinking Their Current Offshore Relationships 3 The Client’s Key Objectives For The Next 12 Months Are Tied To Innovation 6 Offshore Clients Need More Help With The “AsA-Service” Transition 7 Clients Are Demanding Deeper Industry Expertise recommendations
10 To Identify The Right Strategic Partner, Start By Challenging Vendors 10 Supplemental Material
N OT E S & R E S O URCE S Forrester interviewed 20 clients and 25 vendors, including MNCs: Accenture, CSC, Deloitte, and FIS; tier one Indian vendors: Cognizant, HCL, Infosys, TCS and Wipro; and more than a dozen tier two Indian vendors.
Related Research Documents “Sourcing And Vendor Management’s 2011 Priorities” December 21, 2010 “IT Services Firm Changes: What SVMs Must Know” October 21, 2010
© 2011 Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, TechRankings, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective owners. Reproduction or sharing of this content in any form without prior written permission is strictly prohibited. To purchase reprints of this document, please email clientsupport@ forrester.com. For additional reproduction and usage information, see Forrester’s Citation Policy located at www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.
2
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
Clients are rethinking their current offshore relationships After several difficult years of cost-cutting, IT and business professionals are looking forward to the next several years with a focus on technology-enabled innovation. The return of technology budgets and the significant complexity in the technology world — particularly related to the proliferation of as-a-service offerings, mobility, sustainability, and social media — are making SVM leaders rethink their existing vendor relationships. Not only are they concerned about the readiness of their existing vendors, they also worry that their traditional offshore vendors may not be prepared to take a leading role in guiding them through the changing technology landscape. To understand these changing expectations, Forrester conducted a series of interviews and surveys with clients of offshore services. At a surface level, these interviews reflected some expected areas of client focus: offshore IT outsourcing budgets are increasing again; clients continue to focus on cost in their offshore outsourcing; and clients are dependent on their vendor(s) to meet their business needs. Yet below the surface there were deep concerns about the future. Clients understood that the future of offshore services work will look very different from the way it looks today: The increases in IT budgets must be directed toward needed innovations; the focus on cost is not only to achieve reductions but to ensure that all IT spend meets the promised returns on investment; and business alignment means that vendors must be able to step forward with solutions for their clients’ business needs — and mature well beyond an “order taker” mentality. Clients are keenly aware that the next few years have the potential to transform their business and are focused on several key questions:
· Has my vendor invested in the right areas to help me generate business innovation? · Can my vendor guide me through the “as-a-service” landscape? · Does my vendor have the breadth and depth in my industry to advise our company? While Forrester works with many offshore vendors that want to be viewed as trusted, strategic partners to their clients, the clients we spoke with were less optimistic about their current provider’s ability to help them with these questions (see Figure 1).
May 5, 2011
© 2011, Forrester Research, Inc. Reproduction Prohibited
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
Figure 1 Top 10 Changes Clients Want To See With Their Offshore Providers Clients want their offshore vendors to: • Invest in industry and domain expertise, with emphasis on B2B. • Increase knowledge and consulting experience in XaaS and cloud technology. • Improve abilities to innovate. • Introduce new engagement and delivery models. • Increase capacity and capabilities of labs to better support client needs. • Make managed service more successful. • Change account management structure to be no or minimal sales and become trusted advisors. • Strengthen infrastructure, BI, and architecture capabilities. • Improve abilities to market to existing customers. • Invest more in the development of their people and reduce attrition rates. Source: Forrester Research client and vendor interviews, Q1 2011 58746
Source: Forrester Research, Inc.
the client’s key objectives for the next 12 months are tied to innovation Innovation is always a hot topic in the technology marketplace, but the focus of innovation efforts will change over the next few years. Forrester’s Forrsights Services Survey corroborates the priorities on innovation that we heard from clients — that over the past three years, lack of innovation has remained a key concern, with more than 30% of respondents identifying it as one of their biggest challenges in outsourcing relationships.1 Cost reductions, improved client service, increased revenue, and improved productivity are the top influencers that will shape their IT strategy and guide innovation initiatives for the next 12 months (see Figure 2). A consistent theme that Forrester noted in our interviews with clients was the desire for offshore vendors to demonstrate a much higher level of self-initiated innovation. They are anxious to see their vendors take more risks, invest their own money, and challenge the current market trends. The Client Viewpoint While expecting innovation from service providers is nothing new, some of the confusion about the providers’ innovation focus is reflective of changes in the technology industry. Most notably, clients are confused about where vendors are investing their innovation efforts, and whether it will help them achieve their business objectives over the next few years. This challenge is complicated by ineffective sales and onshore management, which clients say causes miscommunication between them and their vendors. Clients tell Forrester that their offshore partners are constantly upselling — and consequently aren’t able to see the broader opportunities for innovations and continuous improvements.
© 2011, Forrester Research, Inc. Reproduction Prohibited
May 5, 2011
3
4
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
The Vendor Viewpoint Most offshore vendors know that innovation is a priority for their clients, but they struggle to find the right balance between providing cost savings and higher levels of innovation. To address this, Forrester has observed many offshore vendors placing more emphasis on building and marketing their consulting organizations. Although several offshore vendors have achieved mixed results with their consulting offerings over the past few years, they have learned important lessons and are beginning to recognize their value across multiple dimensions: as a revenue opportunity within established relationships; as a pre-sales opportunity for client accounts who don’t know or appreciate the full capabilities of their vendors; and as a marketing opportunity to highlight their thought leadership. Forrester’s Viewpoint In the future, we expect that consulting programs will merge with more strategic and global account management capabilities as a guide for clients to orchestrate more complex technology initiatives. Companies are particularly following the lead of Cognizant, which provides a consulting-focused approach to many of its marketing and sales programs, reaping rewards in terms of customer alignment, profitability, and market capitalization.
May 5, 2011
Š 2011, Forrester Research, Inc. Reproduction Prohibited
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
Figure 2 Cost, Service, Revenue, And Productivity Shape IT Strategy “Over the next 12 months, how influential will the following corporate business priorities be in shaping your firm’s IT strategy and initiatives?” Don’t know/ does not apply
Not at all influential to our IT strategy or initiatives
Low influence
1% 1% 14%
Lower the firm’s overall operating costs Improve your customer service
3%
Improve workforce productivity
1%
Improve quality of products and/or offerings
Improve our ability to collaborate outside the walls of the company
2% 19%
Consolidate business units and streamline operations
4% 21%
5%
9% 27%
Launch new products and services into the market
4%
11% 27%
Expand into new geographic markets 7%
18%
37%
11% 22% 14% 48%
Move costs from the capital to operating expense category 8% 19%
45%
32%
24%
51%
22%
38%
32%
44%
2% 8% 30%
Improve our ability to innovate our business model and go-to-market approach
36% 54%
4% 33%
1%
29%
42%
5% 24%
1%
36%
51%
5% 14%
2%
Comply with government regulations and requirements
Improve corporate environmental sustainability and social responsibility 3%
49%
2% 18%
Grow our overall company revenue
Acquire other companies or divest parts of existing business
Critical influence
High influence
41% 38%
18% 19% 21%
34%
24%
27% 11% 24% 11% 30% 21%
5% 6%
Base: 1,007 North American and European IT executives and technology decision-makers Source: Forrsights Services Survey, Q3 2010 58746
© 2011, Forrester Research, Inc. Reproduction Prohibited
Source: Forrester Research, Inc.
May 5, 2011
5
6
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
offshore clients need more help with the “as-a-service” transition Despite all of the hype around “the cloud” over the past few years, adoption of “as-a-service” technologies has been a gradual process for many Forrester clients. While most sourcing professionals are deeply interested in cloud-based IT services offerings, they have been cautious about shifting too much existing IT functionality to a services model — particularly until they understand the full risks related to security and integration (see Figure 3). The Client Viewpoint Clients tell Forrester that vendors regularly pass along a lot of information about their “as-aservice” offerings, but they fall short of providing practical advice. Vendors, these clients say, are rarely willing to put their compensation on the line as a guarantee of implementing a solution. Highlighting a challenge around as-a-service adoption: Two-thirds of the offshore clients Forrester interviewed believe that their current vendors will be able to advise them in this direction, but onethird is uncertain or doesn’t believe that their vendors are capable. The Vendor Viewpoint Vendors realize that if they can step forward with a solid road map and strategic recommendations on an “as-a-service transformation” — backed up with relevant examples and with a certain bit of their own skin in the game — the next few years will be a turning point in their journey to become trusted advisors. They recognize the need for immediate action and are engaging directly with business partners to make new offerings like SaaS implementation offerings and comprehensive BPaaS solutions a reality. They have also formed critical co-innovation partnerships with the major players of industry-specific solutions in their as-a-service offerings. Forrester’s Viewpoint This transformation to “as-a-service” offerings is at a critical point for client-vendor relationships — because clients need help and are looking for true partnership in this area. What’s clear from our interviews is that clients don’t believe they are hearing any advice — or the right advice — from vendors. This is an opportunity for SVM professionals to ensure that vendors are getting the right people talking within their company — reducing the miscommunication that hinders the sales of these offerings and results in unrealistic expectations. Yet it is the vendors that want clients to engage in an as-a-service economy that need to take the lead in this process. They can start by taking the lead through critical roles such as enterprise architects and business intelligence experts, but also by directly addressing the potential value of as-a-service offerings with the business by guiding these clients through a business portfolio analyses and a road map to start on this transformation. Furthermore, all vendors need to have a clear and direct answer to the tough questions about the security and business risk of their offerings and how they fit into existing governance and regulatory frameworks.
May 5, 2011
© 2011, Forrester Research, Inc. Reproduction Prohibited
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
Figure 3 Companies Aren’t Ready To Adopt XaaS “What are your firm’s plans to adopt the following “as-a-service” offerings/approaches?” Don’t know Planning to implement in a year or more
Not interested
Planning to implement in the next 12 months
Interested but no plans Implemented, not expanding
Expanding/upgrading implementation
Disaster-recovery-as-a-service
5%
32%
32%
10% 7% 10%
3%
Storage/backup-as-a-service
5%
34%
31%
11% 6% 8%
4%
Security-as-a-service 5%
47%
24%
7%
Platform-as-a-service
7% 48%
24%
8%
Business-process-as-a-service
7% 47%
Application-testing-as-a-service
6% 46%
Integration/middleware-as-a-service
7% 50%
Compute-as-a-service/ infrastructure-as-a-service Desktop-as-a-service
Business-intelligence-as-a-service 7% 49%
3%
4%
25% 25%
7% 6%
30%
6% 49%
4%
4% 8% 6% 3% 5% 5% 6% 2% 4% 4% 7% 2%
26%
7% 48%
4% 8% 5%
26% 28%
4% 3% 4% 2%
8% 6% 5% 6% 1%
4%
Base: 1,007 North American and European IT executives and technology decision-makers Source: Forrsights Services Survey, Q3 2010 58746
Source: Forrester Research, Inc.
Clients are demanding deeper industry expertise Over the past few years, many offshore services providers have aligned their go-to-market approach around vertical market solutions in an effort to get closer to the needs of their business customers. Two data points from the Forrsights Services Survey, Q3 2010, are relevant to this topic. First, 73% of the senior IT leaders surveyed indicate that improving the quality of products and/or offerings is a top influencer in shaping their IT priorities for the next 12 months. Second, 70% indicate that compliance with government regulations and requirements is also a top influencer. This second point is especially relevant in the healthcare and banking, financial services, and insurance (BFSI) industries, where working within government compliance is absolutely essential to business success.
© 2011, Forrester Research, Inc. Reproduction Prohibited
May 5, 2011
7
8
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
The Client Viewpoint The clients that Forrester interviewed and surveyed indicated that industry expertise is more critical these days due to increased regulatory requirements, consumer demand, and competition. This finding is supported elsewhere in our research: In Forrester’s Forrsights data about selecting future vendors in which 63% to 83% of those surveyed feel that experience with a specific technology service, industry-specific business process, or industry vertical was important or very important (see Figure 4). Fifty-seven percent of clients say they are changing vendors to gain “access to specialized skills/specialized technologies.” The Vendor Viewpoint The vendors we interviewed confirmed that they are being asked to be more industry-specific and acknowledge that it represents some of the most challenging work that clients are asking them to do. They cited work in the following areas as in higher demand:
· Embedding industry-specific solutions or applications on mobile devices. · Creating and supporting loyalty programs with robust data warehouse and analytics capabilities. · Supporting applications and processes that are used in the public sector. · Supporting applications and processes in different geographies around the world and with knowledge of local customs and business practices.
Forrester’s Viewpoint Offshore clients will always be challenged to find third-party providers that have as much, or greater, industry specialization as they do. Clients need to set realistic expectations about the level of industry expertise they can get from third parties — and never assume deep knowledge of microvertical segments unless working with a true specialist in a given business segment. Vendors need to be mindful of their strengths and weaknesses across verticals while striving to go deeper, not wider, in industry specialization. In particular, clients would appreciate seeing offshore vendors — particularly smaller ones — consider smaller number of verticals so that they become more clearly differentiated in a few.
May 5, 2011
© 2011, Forrester Research, Inc. Reproduction Prohibited
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
Figure 4 Expertise In Client’s Capabilities And Industry Are Critical “How important is each of the following criteria to your firm when selecting IT service providers?” Don’t know/does not apply Overall expertise in a particular technology or platform
1 = Not at all important 1% 1% 3% 11% 1% 1%
Capability with the specific 14% services we are seeking 3% 1% 0% Price or cost savings 2% 14% Knowledge/experience with my 1% 2% 7% firm’s industry-specific specific business processes 2% 2% Knowledge/experience with my 9% firm’s industry or business vertical Ability to support or deploy 13% solutions for all our global 9% operations 3% 12% Cultural fit 5% Process maturity (e.g., ITIL, CMMI, industry certifications) Global delivery capability (options for on-site, nearshore, or offshore) Existing business relationship with the firm Ability to take over assets and people Ability to inject cash into our business
2
4% 5%
10% 15%
30%
50%
33%
50% 32%
33%
32%
11%
21%
31% 24%
29%
13%
20%
21% 44%
20%
34%
19%
20%
19%
35% 25%
23%
31%
29%
16%
5 = Very important 50%
24%
19%
2% 7%
4
33%
24%
9%
8%
3
28% 23% 17%
13%
13%
8% 3%
14% 7%
Base: 1,007 North American and European IT executives and technology decision-makers Source: Forrsights Services Survey, Q3 2010 58746
© 2011, Forrester Research, Inc. Reproduction Prohibited
Source: Forrester Research, Inc.
May 5, 2011
9
10
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
Recomme n d atio n s
To IDentify the right Strategic partner, start by challenging vendors The next five years will provide a major test for the evolution of offshore services providers — and SVM professionals need to proceed with caution. Although most offshore service providers have the capabilities to partner with clients on a strategic level, they are often risk-averse and unwilling to proactively invest in the business relationships that will unlock long-term business alignment. Clients of offshore services need to separate those who talk, and those who walk. Savvy sourcing professionals will start by:
· Demanding executive-level innovation discussions. It’s fairly common for offshore vendors to brag to Forrester about their innovation capabilities, only to have clients tell us that the same vendors have never provided an inch of innovation past what is paid for. Clients that are frustrated by lack of innovation from their service providers need to escalate the problem — and tell executives that the innovation they are promising in the market is not working at a tactical level.
· Pushing vendors beyond the as-a-service hype. All technology vendors are quick to talk about their “as-a-service” offerings, but they are often less developed than the vendor will let on. As you sit through discussions about the as-a-service journey, ask the vendor tough yet fair questions related to which firms they have led through this journey, how they are measuring their ROI, and whether they can provide references related to their solutions. Vendors may back down from their bold assumptions — and you will have a realistic starting point from which to assess risks.
· Digging deep on industry-level credentials. Many offshore and MNC vendors have the advantage of having worked with some of their clients now for eight to 10 years, covering certain industry verticals for just as long. It is reasonable for clients to expect that their vendors know where the opportunities for improvement and innovation exist in their industry — and within their clients’ organizations. Co-innovation with major software and product vendors is the new battle cry that Forrester is hearing from almost every vendor doing business in India. SVM professionals should ask for detailed recommendations from their vendors specific to their industry and their business.
Supplemental MATERIAL Methodology Forrester’s Forrsights Services Survey, Q3 2010, was fielded to 1,007 IT executives and technology decision-makers located in Canada, France, Germany, the UK, and the US from enterprise companies with 1,000 or more employees. This survey is part of Forrester’s Forrsights for Business Technology and was fielded from August 2010 to September 2010. LinkedIn Research Network fielded this survey online on behalf of Forrester. Survey respondent incentives include gift certificates and research reports. We have provided exact sample sizes in this report on a questionby-question basis. May 5, 2011
© 2011, Forrester Research, Inc. Reproduction Prohibited
Clients And Vendors Weigh In On The Future Of Offshore Outsourcing For Sourcing & Vendor Management Professionals
Forrester’s Forrsights for Business Technology fields 10 business-to-business technology studies in 12 countries each calendar year. For quality control, we carefully screen respondents according to job title and function. Forrester’s Forrsights for Business Technology ensures that the final survey population contains only those with significant involvement in the planning, funding, and purchasing of IT products and services. Additionally, we set quotas for company size (number of employees) and industry as a means of controlling the data distribution and establishing alignment with IT spend calculated by Forrester analysts. We have illustrated only a portion of survey results in this document. For access to the full data results, please contact Forrsights@forrester.com. Companies Interviewed For This Document 3i Infotech
ITC Infotech
4th Source
L&T Infotech
Accenture
Logica
AppLabs
Mahindra Satyam
Capgemini
Microland
Cognizant
MindTree
CSC
NIIT
Deloitte
Polaris
FIS
Sierra Atlantic
Genpact
Sonata
Geometric
Syntel
HCL
Systime Computer
IBM
TCS
iGate
UST Global
Infosys
Wipro
Endnotes 1
In Forrester’s Forrsights Services Survey, Q3 2011, we asked clients “Which of the following are your firm’s biggest challenges with your existing IT services and outsourcing relationships? (Select all that apply), and 30% chose “Lack of innovation and/or continuous service-level improvements.” In 2009 and 2008, in response to the same question, 38% and 33%, respectively, chose “Lack of innovation and/or continuous services level improvements.” Source: Forrester’s Forrsights Services Survey, Q3 2011.
© 2011, Forrester Research, Inc. Reproduction Prohibited
May 5, 2011
11
Making Leaders Successful Every Day Headquarters Forrester Research, Inc.
Research and Sales Offices Forrester has research centers and sales offices in more than 27 cities
400 Technology Square
internationally, including Amsterdam; Cambridge, Mass.; Dallas; Dubai;
Cambridge, MA 02139 USA
Foster City, Calif.; Frankfurt; London; Madrid; Sydney; Tel Aviv; and Toronto.
Tel: +1 617.613.6000 Fax: +1 617.613.5000 Email: forrester@forrester.com
For a complete list of worldwide locations visit www.forrester.com/about.
Nasdaq symbol: FORR www.forrester.com
For information on hard-copy or electronic reprints, please contact Client Support at +1 866.367.7378, +1 617.613.5730, or clientsupport@forrester.com. We offer quantity discounts and special pricing for academic and nonprofit institutions.
Forrester Research, Inc. (Nasdaq: FORR) is an independent research company that provides pragmatic and forwardthinking advice to global leaders in business and technology. Forrester works with professionals in 19 key roles at major companies providing proprietary research, customer insight, consulting, events, and peer-to-peer executive programs. For more than 27 years, Forrester has been making IT, marketing, and technology industry leaders successful every day. For more information, visit www.forrester.com.
58746