Living in interesting times

The slowdown in the global economy has not hit South African markets quite as hard as other global markets, but the continuing pressure to cut costs and retain profits is presenting opportunities for the outsourcing community.

Donovan Muller, senior executive for outsourcing at Accenture SA, explains that as soon as companies start to experience hardship, they look to cut costs, and outsourcing is a natural strategy for achieving these cost savings.

Part of the problem that companies face is that they have a pool of specialised skills that have typically been with the company for an extended period of time. Over this time, the cost of these people has increased, while the range of work they do has remained static, making it increasingly costly to run key systems.

“By outsourcing these key applications, companies are able to retain access to these key skills, while the outsourcing partner is able to increase the productivity of these employees by using them across multiple clients,” he explains.

Mardia van der Walt Korsten, MD of T-Systems South Africa, says while the need for companies to save money is a natural boon for outsourcing companies, the global economic slowdown also poses significant risks for the industry.

“Along with the fall in demand for goods and services, we have seen a dramatic pull back in investment. This has particularly hurt those IT companies in the systems integration business, but poses risks across the board,” she comments.

“Internationally, the risk of companies going bankrupt is something that T-Systems as a whole has had to deal with, but luckily this is not something that has affected us in South Africa as yet,” she states.

“The most direct impact of the global slowdown on the outsourcing business is increased pressure on pricing. This has been compounded by the long sales cycle that typifies outsourcing deals,” she adds. “We are seeing companies that we are talking to come back and ask us to find an additional 10% to 15% saving on the initial cost of the deal. This is on top of the traditional saving that an outsourcing deal normally delivers in the latter stages of the contract.

“This is going to make business particularly difficult for companies that have already cut their margins down to the absolute minimum, as it will be hard for them to find these additional savings,” she notes.

According to Van der Walt Korsten, customers are looking for increased flexibility in the contracts that they are signing, all of which dramatically increase the risk being placed on the outsourcing provider.

Nigel Henderson, UCS senior executive for infrastructure services, adds that the need for better IT governance, risk and compliance management is another incentive to move to an outsourced solution. “By outsourcing these services it is possible for a CIO to have access to all these skills without having to manage the risks that are associated with running a large IT department.

“The real savings that companies expect to achieve through outsourcing their IT infrastructure applies mostly to first generation outsourcing clients, those that have not outsourced before, but with second and third generation outsourcing clients, it is more difficult to find the levels of savings that customers are looking for,” comments Van der Walt Korsten

“Outsourcing is firmly entrenched in companies that have a more mature view of their IT infrastructure,” comments Hamilton Ratshefola, CEO of Cornastone Consulting.

“At the moment, the decision on whether or not to outsource a specific application or element of infrastructure is based almost entirely on cost. The broad outsourcing market is largely commoditised and this puts additional pressure on players in this field to ensure they have the economies of scale to deliver the price points that customers are looking for,” he says.

In the 1990s, there was a trend towards doing end-to-end outsourcing, especially in some of the large companies. This trend has reversed to a certain extent with companies now trying to find a balance between the benefits of appointing a single outsource partner and benefiting from the reduction in complexity, and appointing multiple outsourcing partners to get the benefits of the additional expertise in each company.

There is a third model emerging where the primary outsource partner takes over the management of all the smaller partners, acting as an aggregator of services and providing the client with a single point of contact for all its IT services.

Van der Walt Korsten admits that playing the part of an aggregator does place additional risk on the primary outsource partner, as it is ultimately responsible for the performance of other partners, some of which may be competing with it for other contracts.

Accenture's Muller says while general outsourcing is well entrenched in South African companies, the idea of business process outsourcing (BPO) remains a marginal one. “The idea of outsourcing the contact centre is well established, but this is largely where BPO starts and stops for most local companies.”

He comments that the time may be right for companies to look at expanding the scope of functions they choose to outsource. Other areas that are ideal for outsourcing include finance and performance management, supply chain, loyalty programmes and HR and payroll.

The economic situation has created an ideal opportunity for outsourcing companies to penetrate accounts that have been reluctant to outsource in the past. However, these opportunities carry real risks as outsourcers are being pushed to deliver on the savings that they promise in a more aggressive fashion than even they are used to.