Pulse Survey: Globalization leads to worldwide services supply chain; the challenge lies in effective management


Outsourcing often is viewed as a one-dimensional, point-to-point solution, typically between a U.S. or Western European organization and a company in India. In reality, today’s global sourcing model is akin to an intricate manufacturing supply chain. Organizations are building and utilizing complex services supply chains to lower costs and address the emerging opportunities and perceived threats of globalization, according to EquaTerra ’s Advisor and BPO/ITO Service Provider Pulse Survey 2Q08.
The survey of top outsourcing service providers and EquaTerra’s own client-facing advisors reveals data on current and projected demand for outsourcing worldwide, plus insight to the impact ongoing globalization is expected to have on outsourcing.
“Services supply chains have steadily become both more diverse and more widely distributed, with large organizations forming hundreds of relationships with hundreds of service providers worldwide,” says Stan Lepeak, managing director of research for EquaTerra. “Ongoing globalization is accelerating that process and adding new layers of complexity.”
2Q08 Pulse looks at some of the challenges relative to these expanding services supply chains.
Most organizations don’t yet do a good job of arranging relationships with services providers. In fact, EquaTerra finds buyers’ overall skills at developing quality outsourcing business cases are mediocre, particularly when it comes to assessing total costs to achieve desired improvements from outsourcing and attendant indirect or shadow costs.
Respondents to 2Q08 Pulse believe the two most useful metrics for building a solid outsourcing business case are current performance levels (75 percent); and current direct costs (74 percent); yet the study finds many buyers don’t accurately capture even these most important measurements.
The ability to optimize and manage global services supply chains on the back end is proving equally challenging. 2Q08 Pulse respondents rate buyers as poor to mediocre across a variety of governance activities, including their ability to measure service level agreements (SLA) and end-user satisfaction. While these problems are not new, they are exacerbated as organizations do more global sourcing.
Creating complex services supply chains is intrinsic to globalization and struggles to develop the tools and skills needed to manage them is to be expected, according to Lepeak.
“It took decades for manufacturing supply chains to mature. Now organizations are steadily migrating from those vertical integration models to horizontal specialization.”
2Q08 Pulse indicates there is accelerating interest in outsourcing’s flexible cost and operating models as Western organizations seek ways to weather the economic downturn and counter lower-cost global competition. The focus on globalization in the survey draws on data collected in an earlier study conducted by the Economist Intelligence Unit on behalf of EquaTerra and World 50 , which polled more than 200 C-level and other senior executives from 19 industry groups worldwide about the benefits and challenges of globalization.
In that study, more than 54 percent of respondents reported the No. 1 response to globalization was a greater emphasis on improving business process efficiency and effectiveness. Almost half said their organizations were investing in new or existing operations in foreign markets, including third-party outsourcing relationships and the establishment of captive offshore operations. Many (35 percent) said they were also investing in IT applications to become more competitive and reduce costs.
EquaTerra increasingly sees Western organizations tapping the robust IT talent pool found in emerging markets, and turning to IT outsourcing as a way to upgrade and expand IT capabilities without upfront capital investment.
Top-line finds on outsourcing demand:

Demand for business process and IT outsourcing (BPO and ITO) is expected to exceed 2006 and 2007 levels. Pulse demand projections and pipeline forecasts are indicative of deals that typically close over the next two to three quarters.
o EquaTerra advisors (38 percent) indicated demand levels were up for 2Q08, down 12 percent from 1Q08 but up eight percent over 2Q07.
o Service providers characterized their 2Q pipeline for BPO and ITO deals as rising 10 percent to 52 percent, a 14 percent increase over last quarter. Projections for next quarter were only slightly less optimistic, with 45 percent of providers polled expecting continued growth in demand, down from 50 percent last quarter.
• Outsourcing efforts with short-term return on investment or that deliver quick cost savings are going forward , often at an accelerated pace. Not surprisingly, efforts focused on complex process transformation or that require significant upfront investment are more likely to be slowed or on hold.
Demand and supply increased for emerging knowledge process outsourcing functions such as engineering, research and development, financial modeling and analytics, and legal process work. There was also growth in areas like document services, facilities and real estate management and logistics services.
• EquaTerra estimates there were more than 150 outsourcing deals in 2Q08 with an average total contract value (TCV) of $270 million. This compares to 120 deals in 1Q08 with an average TCV of $120 million. These numbers exclude deals not publicly announced or announced without publishing deal details.

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