Canadian outsourcing trends: June 2011 update
The Canadian outsourcing industry continues to grow in 2011 after an overall positive year in 2010. BPO registers a year-on-year (YOY) growth of 2.25 per cent whereas Hosting Services grows by 8.75 per cent. The CORE (Centre for Outsourcing Research & Education) Monitor Governance report, a joint research effort with industry experts, IDC Canada and CORE in the last quarter of 2010 had estimated a year-end growth of 3.8 per cent as compared to 2.1 per cent in 2009. Although the inertia in the market caused by a still-uncertain global economy had prevented some material transactions, the last quarter in 2010 had seen substantial increase in activity with some sizable contract signings. IDC and Merit Outsourcing Advisors expect 2011 to be a good year for outsourcing in Canada with estimated increase of 4-5 per cent.
IDC’s survey results show that while 70 per cent expect no change, a net six per cent of Canadian companies plan on spending more money on outsourcing. The overall pulse of the market is positive: higher expectations than that of last year, but lower than when compared to 2008. Cost saving continues to be the primary driver for outsourcing. However, the need for flexibility of sourcing relationships to adapt as the client’s business changes, the ability to use best-of-breed providers and alternative delivery models such as asset-light, cloud computing, offshore delivery services and access to resources to enable organisations to scale up and down, are emerging as important drivers for outsourcing. This need for flexibility is being exhibited in the trend towards shorter-term and smaller dollar-value outsourcing contracts. The average length of a Canadian outsourcing contract has come down from seven years in 2001 to a less-than-five years in 2010. This is especially true for new deals that tend to be averaging 4.1 years focused on one or two towers. Even the larger contracts (C$100m or greater) that tend to have longer durations are getting shorter. A greater proportion (18 out of 22) of the large deals has been renegotiations, renewals and extensions. The average Total Contract Value or TCV has decreased from $100m in 2001 to under $40m for 2011.
Discussions with top sourcing executives as a part the CORE/IDC research and Merit Outsourcing Advisors client engagements also reveal the following trends and characteristics:
• An important trend is a shift towards multisourcing where clients use multiple providers to deliver a suite of services, instead of one primary service provider. As a result, the client acts as the integrator or manager of the group of service providers. Research reveals that by midyear 2011 most buyer organisations have made progress on developing a multisourcing strategy compared to December 2010 when only 20 per cent organisations had an explicit multivendor governance model. While multisourcing is currently the preferred sourcing approach of large and enterprise-size Canadian businesses, small companies that employ fewer than 250 employees still prefer the single service provider approach to outsourcing IT and business processes.
• Reasons behind Canada’s preference for the multi-vendor outsourcing model range from the advantages of best-in-class delivery to ease of progression from one deal to the next. The main reason, though, is cost saving, that by competitively tendering discrete pieces of technology to the competitive market lowers overall sourcing costs. Opinions from buyers and service providers indicate that multisourcing puts more governance onus on the buyer. Although most service providers want to see the industry develop a “mature” approach, the development of multivendor governance models has not caught up with implementation.
• A bit of a dichotomy in the market as some buyers are becoming frustrated by the constant rebid/renegotiation mentality and the additional governance overhead that multi-vendor sourcing creates. The result is some buyers are opting for longer term contracts and consolidating some of their service providers.
• Cloud providers have been offering no-term contracts. While currently limited to some cloud services, particularly those marketed to the SMB market, this potentially could shift buying expectations of large, enterprise firms. As per IDC, there is a movement toward true utility computing where services can be provisioned, contracted for, and billed like other infrastructure-based services such as cable and electricity. While large enterprise-class computing may not be outsourced currently, small and midsize businesses (SMBs) are beginning to buy their hosting and computer services on a per-hour and per-gigabyte basis. Some of the initial service providers playing in this space like IBM and Bell have rolled out utility services already.
• Several Merit clients have developed updated sourcing strategies, with planned bundles of IT services brought to market for competitive sourcing. Long term resulting delivery models will have two or three primary IT service providers, with relative competitive tension in the system, yet few strategic service providers to manage and integrate service delivery for end users.
• Merit has observed a rapid uptake in the recognition and desire for buyers to invest in more robust governance processes incorporated in to a governance operations procedure manual.
While the cloud is predicted to take a more important space in the outsourcing industry, some vendors will struggle to move from a traditional delivery model to providing a cloud infrastructure. With the emergence of numerous niche providers, a trend towards increased “specialisation” of the vendors could take place, where the vendors focus on their most value-added service. Relationship management and governance will take an increasingly important position as we see the move towards a more mature “working relationship” between the buyer and the provider.