Forrester the Changing Value Propos Outsourcing Jan22

8/9/2019 Forrester the Changing Value Propos Outsourcing Jan22

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FOR SOURCING & VENDOR MANAGEMENT PROFESSIONALS

WHY READ THIS REPORT

Choosing the right supplier or a particular engagement, out o a multitude o offshore vendors, is notan easy task; especially when considering the constantly evolving subtleties o cost and delivery optionsin a highly dynamic and competitive environment. Although large I services vendors such as ataConsultancy Services, Cognizant, In osys Limited, Wipro I Business, and HCL still capture the majorityo offshoring deals, there is a changing value proposition that avors midsized market players — onethat will increase in importance in coming years. Tese suppliers bring exibility, agility, and businessalignment to a marketplace that or the past decade has been obsessed with growing scale. We spoke

with several midsized Indian offshore vendors to uncover the aggregate strengths o the midsized vendorsegment, their unique differentiators, and the reasons why a midsized vendor might be the right choice orcertain types o engagements.

The Changing Value Proposition For Midsized OutsourcersThe Agility, Flexibility, And Specialization Of Midsized Players Is At A Premium In AChanging Technology Environmentby Hansa Iyengar

with Chris Andrews and Fraser Tibbetts

JULY 31, 2013

MARKET DEMANDS CREATE OPPORTUNITY FOR MIDSIZED PLAYERS

Over the past decade, it has become common to re er to the offshore outsourcing space in terms o scaleby categorizing vendors as “tier 1” players and “tier 2” players. Te astest growing vendors, in terms osize, were labeled “tier 1,” while the others were relegated to “tier 2” status. However, the market dynamicshave changed. Clients today emphasize a need or vendor agility, exibility, the ability to offer businesssolutions that stem rom tight vertical (and subvertical) alignment, responsiveness, and trust. Scale aloneis no longer the only actor under consideration when sourcing suppliers or engagements, and midsized

vendors will be playing a key role in the uture o offshoring.1

Some o the major dynamics that are affecting the growth o this vendor segment include the ollowing:

■ Price is no longer the only factor that signicantly affects a company’s vendor choice. Teservice provider has moved up the value chain rom being a low-cost alternative or sourcingnoncore unctions to a “partner” who is increasingly involved in critical aspects o the client’sbusiness. Te depth o technological knowledge and service-level expertise that a supplier can bringto the engagement and the customer’s business as a whole is becoming an inuential actor in the

vendor selection process. Over 80% o the respondents to the Forrsights services survey believe thatpossessing specic service-level capabilities is critical when selecting vendors, a gure that is equal tothe number o respondents who value the ability to provide cost savings (see Figure 1).

■ Engagements are becoming more specic. Although outsourcing is still popular as a means torein in costs, businesses are increasingly turning to technology to nd newer ways to connect withtheir end customers in a 24x7 world. Te number o highly specic initiatives undertaken to buildcompetitive differentiators and improve customer experience within the enterprise segment has seen

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The Changing Value Proposition For Midsized Outsourcers 2

© 2013, Forrester Research, Inc. Reproduction Prohibited July 31, 2013

rapid growth over the last ew years. Tese “ ront office” initiatives, with visibility rom businessleaders, require suppliers to possess intricate knowledge o the industry dynamics and businessprocesses in an enterprise’s vertical. Tey also place greater emphasis on vendors’ ability to drive

innovation by championing initiatives or improving the business’ ability to deliver enhancedservices to its end customers. In this scenario, a vendor’s ability to bring executive leadership tothe table as a strategic partner — and not just a service provider — is becoming a key actor inthe selection process.

■Demand from the small and midsized enterprise segment (SME) is increasing. We seeincreasing demand rom the SME segment or outsourcing as a driver o efficiencies and astertime-to-market. Enterprises in this segment continually require greater levels o customizedservices; however, they ofen have very small budgets. Tese SMEs are ofen overlooked bythe larger vendors because the smaller scale o the engagements offers ewer opportunities ordelivering industrialized services and thereby inadequate return on investments. Tese arethe sweet spots or the midsized vendors who come in with their skills in dealing with nichebusiness areas, deep vertical expertise, experience in handling smaller projects, and ability tooffer highly competitive and exible pricing while maintaining service quality.

Figure 1 Expertise In Specic echnologies Or Verticals Is Gaining Importance

Source: Forrester Research, Inc.99584

Cultural t

Source: Forrsights Services Survey, Q2 2012

Price or cost savings 32% 49%

Capability with the specic serviceswe are seeking 36% 45%

Overall expertise in a particulartechnology or platform 38% 40%

Knowledge/expertise with my rm’sindustry-specic business processes 38% 30%

33% 19%

Knowledge/experience with myrm’s industry or business vertical 36% 30%

“How important are the following criteria to your rm when selecting IT service providers?”(Not all responses shown)

Base: 1,058 IT services decision-makers

Important Very important






MIDSIZED VENDORS REFINE THEIR VALUE PROPOSITION

Te value proposition or midsized players will evolve in a highly competitive marketplace. In somecases, midsized suppliers may not have the scale and breadth o capabilities to offer end-to-endservices, and some clients tell Forrester that, as they rationalize their offshore mix, some servicespartners will be eliminated rom their supplier port olios.

However, Forrester expects that this consolidation will happen selectively. While 46% o I servicescustomers indicate that they plan to consolidate spending with a smaller group o suppliers, roughly25% tell Forrester that they are expanding offshore work and adding new suppliers — meaning thatconsolidations do not preclude using midsized players. In many cases, midsized players are ofenbrought in as “specialists” to provide highly customized or niche services on engagements wheresubsegment specialization is needed. Further, shrinking deal sizes and a selective-sourcing approachhave emboldened midsized vendors to seek share-o -wallet rom the incumbents. Te unique value

propositions or these midsized vendors include:

■An increased focus on their specializations. For years, no midsized player would admit to itsdifferentiation, lest it be pigeon-holed as a specialist provider and cut out o other deals. Yet, amajority o midsized vendors have built their business propositions around differentiated offerings

or specialized subverticals such as air traffic management and passenger analytics within airlines;port operations automation and reight management within shipping and logistics; and hotelmanagement solutions within travel and tourism. Tis specialization is welcomed by clients, whoincreasingly need access to a well-trained, stable work orce to execute projects. Tey have alsobeen able to build substantial domain and technological specializations around the core issuesparticular to these verticals and are ofen leveraged as best-o -breed providers. A list o the verticaland service port olios or the vendors interviewed or this report is provided (see Figure 2).

■Recognition that their smaller size has benets when working with smaller clients. In thepast, the smaller size o midsized vendors meant that they had to ght harder to grow business.Tey achieved this with an unrelenting ocus on customer satis action. Tis emphasis oncustomer satis action is proving benecial or this vendor segment, as customers are willingto trust them on their ront office initiatives. For instance, Mindtree is doing a high-proleengagement with a leading US hotel chain developing a mobile solution to enable real-timeinteraction between their event management staff and event organizers, increasing the efficiencyand effectiveness o the hotel’s event management services. A crucial part o the midsized

vendor’s value proposition is that they are highly adaptable to clients’ pricing, delivery location,and staffing requirements. Tis exibility is essential because about 95% o their engagements

all in the sub-$5 million range and they must be able to adapt to client requirements to win,retain, and increase share-o -wallet rom these customers (see Figure 3).

■An ability to attract and retain lateral talent. Attrition, especially at higher levels within themanagement and technical delivery teams, remains well below 10% across all the midsized

vendors we spoke to, compared to the industry average o 14-17% as per NASSCOM estimates.






Te investments they make in attracting and retaining lateral hires enables these vendors tobuild deep wells o expertise, better positioning them to deliver in the areas in which clients putemphasis on the quality o resources rather than the quantity.

With pockets o deep specialization, a ocus on limited verticals, and experience with smallerengagements, the midsized vendor segment makes or a better alternative when sourcing or specicskills rather than scale. Tese vendors are also very relevant or clients looking or an agile, exible,and accommodating supplier or smaller engagements.

Figure 2 Midsized Vendors Specialize In Specic Niches


Vendor Specializations

3i Infotech • Portfolio of proprietary software for the BFSI segment — from core banking solutions toanti-money laundering and treasury solutions in banking, to investment management

solutions and core general and life insurance solutions in nancial services and insurance.• Varied services portfolio for the BFSI segment from platform-based testing services toapplication development and maintenance and infrastructure management services.

• Strong ERP sk ills in the manufacturing, retail and distribution segments.

Firstsource • Collections, transaction processing, and customer management BPO services across allchannels such as voice, web chat, social media, email, IVR/self help, etc.

• Strong suite of platf orm-based BPO services, especially around workforce management, ordermanagement and provisioning, fraud management, customer insights/analytics, and socialmedia analytics and reporting.

Hexaware • Strong skills across ERP produc ts from SAP, PeopleSof t, Oracle E-Business Suite, F usion,Workday, SFDC, etc., around a limited set of ver ticals.

• Strong suite of business intelligence/analytics o erings.• Comprehensive set of solutions around quality assurance and testing.

• Rapidly growing remote infrastructure management services.• Deep ver tical expertise in the travel and transportation, nancial services, and healthcare(specically US healthcare) segments.

ITC Infotech • Very strong infrastructure services, testing , CRM (loyalty), and SAP prac tices.• Deep ver tical expertise in industries like manufacturing, BFSI, hospitality, consumer packaged

goods ( CPG), and retail (especially fashion retail).• Several proprietar y solutions and solution accelerators for customer-focused industries,

especially around managing customer loyalty programs, managing and reporting corporatesustainability performance, and transaction monitoring (order management capabilities) fortrade routing systems.

L&T Infotech • Ability to leverage the presence of parent compan y, Larsen & Toubro Limited, in sectors suchas technology, energy and petrochemicals, power, manufacturing, nancial services,insurance, and engineering and construction.

• Deep ver tical and subvertical expertise in niche sectors within oil and gas nancial services,media and entertainment, automobiles and aerospace, manufacturing, travel and logistics,and plant equipment and industrial machinery.

Mindtree • Strong por tf olio of BI/analytics o erings for industries such as consumer packaged goods,retail, media, and travel.

• Impressive por tfolio of proprietary frameworks, solutions, and products across focus verticals(including Agile development, testing, infrastructure).

• Niche sk ills within the BFSI segment in areas such as compliance, customer, and risk management.






Figure 2 Midsized Vendors Specialize In Specic Niches (Cont.)


Vendor Specializations

Sonata • Deep subvertical specializations across areas like multichannel commerce, POS systems ,supply chain, sales and marketing solutions, and BI in the retail segment.

• Expertise in subsegments within the travel and transportation vertical like packaged touroperators, business travel agencies , ISVs in the travel segment, and airlines .

UST Global • Deep specializations around areas such as grocery retail/supermarkets within the retailsegment and payer insurance within the healthcare segment.

• End-to-end o erings in mobility services, from mobility strategy consulting throughimplementation.

• Expertise in legacy modernization and por tf olio rationalization across focus ve rticals.

Virtusa • Strong specializations within BFSI around areas like customer onboarding, fraud and risk management, loan origination, compliance solutions, claims management and recove ry,policy management, and underwriting services and suppor t.

• Heavily focused on driving innovation for clients by engaging with them to help design,develop, and deliver new products and services , a f ocus that comes from their engineeringand product development heritage .

Figure 3 Te Majority O Engagements For Midsized Vendors Fall In Te Sub-$5 Million Range


Source: Data collected from 8 different IT services providers

Clients with contract values of $5 million (USD) or less?

78%

Clients with contract values of $5-$10 million (USD)?12%

Clients with contract valuesof $10-$25 million (USD)?

8%

Clients with contract values of $25 million (USD) or more?

2%

Base: 2,228 client contracts






R E C O M M E N D A T I O N S

WHEN ENGAGING WITH A MIDSIZED VENDOR, EXERCISE DUE DILIGENCE

As selective-sourcing becomes prolic, midsized vendors offer a great option or customers wantingto re-evaluate existing vendor relationships. However, the difference between true differentiation andgood marketing is a subtle one, and you’ll need to invest in your due diligence process. Some o the

actors that sourcing pro essionals need to keep in mind while evaluating these providers include:

■ Identifying the right opportunities for a midsized player. Identi y the project objectivesand invest in nding the service provider who can add the most value to the project andits outcomes. Managed well, these smaller vendors can ofen add greater value to theoutcome due to their experience with, and expertise in, niche services.

■Asking tough questions in the due diligence stage. Completing a due diligence andmaintaining dialogue to better identi y precise areas where specializations exist andwhere these special skills might t into your requirements is a necessity. In all cases, ask

or re erences and examples o the business results that the supplier achieved. Ask yourprovider to describe its capabilities in new areas o offshore market differentiation, suchas Agile development capabilities, and its ability to apply reusable sofware assets to yourindustry-specic needs.

■ Investing in your backup plan. Tis vendor segment is relatively volatile, in that it’s proneto mergers and acquisitions. Further, as pressure on the offshore marketplace continuesto grow, Forrester expects some o the more specialized vendors to become acquisition

targets. For these reasons, you’ll need to design contingency plans designed to preventservice delivery disruption in case o such an event.

■Leveraging them for price competition. Midsized vendors tend to have competitivebilling rates and exible pricing models and contract structures. Tey are generally agilebecause their smaller size results in aster decision-making processes and relatively loweroverhead. You can use them to challenge the prices o tier 1 suppliers and increase thecompetitiveness o bids.

W H A T I T M E A N S

A MIDSIZED VENDOR MAKES SENSE IN THE CORRECT CIRCUMSTANCES

Sourcing pro essionals need to take notice o these budding services providers because they offermore options when it comes to identi ying the right supplier or their engagements. Some o thesituations in which a midsized provider can be highly relevant include:





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■When you are looking for specialized expertise. Utilizing a midsized vendor makes sensewhen sourcing or smaller project-based engagements that require specic technical orsubvertical expertise or demand a high level o attention to detail rom the service provider.Tey can also compensate or shortcomings due to seasonal uctuations in business volumes.

■When budgets are scarce. Utilize midsized vendors when sourcing or engagements thatrequire extensive offshoring as part o a wider initiative but within a budget constraint.Because most o the employee base or these midsized vendors is based offshore, they wouldbe a strategic t or this scenario.

■When you come from the SME or midmarket. Utilize midsized vendors when sourcing orSME customers who ofen do not get the attention o the larger providers due to the smallersize o their engagements or the need or highly customized offerings, where you need the

ear o executive-level resources at your vendor.

ENDNOTES1 Vendors included in this report are 3i In otech, Firstsource, Hexaware, I C In otech, L& In otech,

Mindtree, Sonata, US Global, and Virtusa. Basic details about their horizontal and vertical ocus, deliverylocations, and F Es were collected through an initial questionnaire which was ollowed up by in-depth

vendor interviews.

Forrester the Changing Value Propos Outsourcing Jan22

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