PRINT THIS PAGE Top ten most significant events in 2005 for the global outsourcing marketplace
08/03/2006. Source:Everest Group.
 Outsourcing industry insiders say that all signs point to an industry on the verge of restructuring. Last year was a watershed year for the global outsourcing industry, with key events indicating a marketplace poised for restructuring, according to a review of buyer, supplier and investor activity by Everest Group.
'The key events of 2005 point to significant changes on all fronts, which taken together, indicate that the outsourcing paradigm is fundamentally changing,' said Peter Bendor-Samuel, CEO of Everest Group.
'A number of trends are converging and market-changing drivers are coming into play - from the coming of age of the major Indian suppliers, to the unbundling of contracts where deal size is getting smaller, contracts are getting shorter and work is being spread across multiple providers, to the fact that large outsourcing contracts signed in the 1990s are coming up for rebidding.' Bendor-Samuel added, 'This is forcing industry consolidation and leadership changes, among other things. What we are witnessing today is a global industry on the verge of restructuring, which will result in a redistribution of wealth across the entire spectrum of suppliers, buyers and investors.'
The ten most significant events in 2005 for the global outsourcing industry, according to Everest Group's analysis, are:
10. Genpact Operates as an Independent Provider. On December 31, 2004, the agreement among Genpact's (then Gecis) key shareholders - General Electric, General Atlantic Partners and Oak Hill Capital Partners - was completed with the private investors taking a majority interest in Genpact. GE had established the company as a captive provider in 1997 to provide internal business support for GE. The year 2005 marked Genpact's official debut as India's largest independent business process outsourcing provider, with the timing of the equity sale demonstrating the importance and profitability of the offshore model, but also signaling a possible peak in offshore valuations.
9. Major Players Buy their Way into the HR Outsourcing Market. Affiliated Computer Services (ACS) acquired Mellon Financial Corp.'s HR outsourcing capabilities for USD 405 million in May, following Electronic Data Systems' (EDS) USD 420 million purchase in January of an 85% stake in ExcellerateHRO, a new company EDS formed with HR consultant Towers Perrin. These milestone events underscore the enormous bets that the very large business process outsourcing (BPO) and IT outsourcing (ITO) services providers are placing on the highly attractive HR outsourcing space, which could someday rival IT outsourcing.
8. CSC Attracts Potential Suitors. Lockheed Martin Corp. and a consortium of private equity firms, including Blackstone Group, Texas Pacific Group and Warburg Pincus, entered into preliminary talks with Computer Sciences Corporation (CSC) to acquire the outsourcing giant, as the U.S. government continued to step up its outsourcing of computer and IT services work to suppliers like CSC. If CSC had been sold in 2005, its acquisition would have capped years of consolidation within the IT industry - a trend that is showing signs of spilling over into the maturing ITO sector.
7. TCS Signs Landmark Contracts. In September, Tata Consultancy Services (TCS) announced its agreement with Dutch bank ABN AMRO to provide Applications Support and Enhancements - the largest IT deal ever won by an Indian company, valued at USD 240 million. In October, TCS announced a second blockbuster deal, valued at USD 847 million, with UK insurance and pensions firm Pearl Group. Under the terms of the agreement, TCS will transfer Pearl's back-office business processes to a new TCS subsidiary that will employ the majority of Pearl's back-office staff and in which Pearl will own a minority stake. The new subsidiary will also offer back-office services for other life insurance and pension companies. These transactions signal the growing ability of the large Indian firms, for the first time, to land major contracts and to take on the type of large, higher risk deals, routinely handled by the traditional players, that involve the supplier acquiring and managing an entire internal function for the buyer.
6. Infosys Ranks as Top Three Most Valued IT Supplier. Infosys' market capitalization of USD 21 billion vaulted the Indian firm into the number three position among the large cap providers, behind IBM and Accenture and ahead of other global majors, including CSC and EDS. This achievement underscores the breakthrough of the top Indian suppliers to the major leagues in 2005.
5. GM Re-bids Outsourcing Work. General Motors (GM), about to announce 40 major IT contracts worth USD 3 billion annually over the next five years, has changed the way it outsources in this area. The majority of the outsourced IT work had been handled by EDS, which GM purchased in 1984 and later awarded a 10-year contract in 1996 when GM sold EDS. Despite this relationship, GM has re-bid its IT work to a short list of 18 suppliers as it rethinks its one-supplier approach and sets into motion a trend that others are likely to follow.
4. Major Suppliers Experience Senior Executive Turnover. In 2005, CEO Jeff Rich left ACS and was replaced by ACS COO Mark King. In addition, Kevin Campbell left Hewitt Associates to join Accenture, and HP tapped former EDS executives Steve Smith and John McCain to run various operations in its global services and consulting divisions. These executive changes top a larger list, as the major suppliers continued throughout the year to acquire new talent and position themselves for a changing world order.
3. Sears Terminates Mega-Outsourcing Contract. Signed in June 2004 and terminated almost a year later in May 2005, the unraveling of a 10-year IT outsourcing pact between Sears Holding Corp. and CSC was a cautionary tale on the need for buyers and suppliers to address exit strategies, including terms for rehiring employees, absorbing assets and establishing business continuity procedures, right from the start. The divorce was also an unpleasant reminder of how outsourcing contracts are subject to changes in management strategy, especially when new management comes in.
2. Emerging Markets Position Themselves as Sites for Offshore Labor Pools. From Poland and Malaysia to Eastern Europe and China, more and more countries are entering the offshore market. While India strengthened its hold on the BPO suppliers' market, other regions continued to thrive, expanding niche capabilities. But the real competition is starting to heat up as the foreign offshore market prepares to expand into new geographies across the globe.
1. Lou Dobbs Helps Accelerate the Outsourcing Trend. Under the banner of 'There is No Such Thing as Bad Publicity,' Lou Dobbs arguably helped to promote the outsourcing industry. Despite repeated anti-outsourcing coverage on his popular CNN show, U.S. companies continued to outsource and offshore in 2005 in growing numbers - and weren't even afraid to admit it. In a recent broadcast, Dobbs reported on the plans of Intel, Microsoft and J.P. Morgan Chase to expand their investment in outsourcing to India and Asia. Dobbs remarked, 'J.P. Morgan Chase didn't even try to hide its outsourcing plans. J.P. Morgan Chase spokesman Michael Golden said in this statement, quote, "we have found high quality, low-cost staff in India and we want to continue investing in the country."'
Everest Group provides strategic advisory services that help companies worldwide harness the power of outsourcing. Our offices in the United States, Canada, India, Australia, and the UK enable us to serve clients effectively around the world. Since 1991, we have completed hundreds of major outsourcing transactions in more than 30 key business processes. For more details, visit www.everestresearchinstitute.com
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