Sourcing advisory firms: short and medium term outlook

In two previous posts (here and here) I wrote that the outsource market in Q4 2008 and Q1 2009 was severely impacted by the effects of the economic meltdown. Especially the volume of big, complex deals was hit badly and the attention shifted to smaller deals to reflect the lower risk appetite of most companies.
I see quiet a lot of activity going on within smaller Dutch outsourcing advisory boutique firms and some of these firms are actually actively hiring sourcing consultants again. So despite the fact that outsourcing introduces additional risk can many companies not resist the temptation.

Outsourcing with as a main driver to cut operational cost in the shortest time possible also means that sourcing advisory firms will be asked to a) spend the bare minimum on advisory and b) get a signed contract as soon as possible. I expect that this will result in cutting corners and thus an increase of advisory work in the area of renegotiation and mitigation within one or two years. See this post for the baseline ingredients of a good sourcing relationship.

Expectation for the short term
My believe that cutting corners by speeding up outsourcing projects may just result in postponing certain expenses as a sloppy contract may require some extensive rework later. See also this post on The Outsourcing Weblog in which the author comments on the ‘speed sourcing’ proposition of Equaterra.

So this is my personal outlook for the different types of sourcing advisory firms in the short term (see also the previous posts on this subject here and here):

Independent one-stop-shop
In theory has the one-stop-shop the advantage of being able to provide a wide array of services related to sourcing (e.g. legal, tax, selection), but I do not think they are able to capitalize on it. Why? Because companies outsourcing want it done fast and at the lowest risk possible. That means going for the guys/gals with the solid track record: the independent niche players (e.g. TPI, Equaterra, Gartner, Quint). For the Big 4 is outsourcing an advisory service they provide as a side dish, it is not their bread and butter.

Independent niche players
These independent niche players can be split in three main groups with some sourcing advisory firms combining the first two (e.g. Gartner, Everest Group).

• Advisory Firms. These guys are very busy targeting those companies which believe outsourcing can them to free up cash quickly. The ‘Time-to-Signature’ of the outsource contract is the key performance indicator which the client is managing the advisors on. Cutting corners and applying standard templates to capture the engagement as fast as possible is however likely to result in a lot of mitigation and renegotiation in one or two years I expect. Outsourcing complex services is not something to be taken lightly without running a serious risk of getting burned. So expect the same guys rushing deals to the market to be involved with cleaning up their mess in twelve to eighteen months from now (and quiet some insourcing again as senior managers start back tracking on previous sourcing decisions).
  
• Research Firms. The second type of sourcing services is related to providing research information on for example vendor ratings. This type of information has its uses, but be aware that a substantial part of the marketing budget spend by vendors of BPO, ITO and KPO services goes to these research companies. Paying to be included in research I guess also means vendors want to see something back in return: a decent ranking within the (independent) research publication (isn’t what clients have to say of these vendors more important than what the vendors themselves have to say? But that is a whole different discussion).
  Anyway, besides the constant challenge of ensuring your independence as a research analyst is there now the economic crisis with the marketing budget being one of the first casualties. And vendors cutting their marketing budget means substantially less income for research firms. Same applies for the conferences these firms organise: not many executives will be allowed to go to Geneva or Miami to attend a conference on outsourcing. So I expect that those research firms that have a hard time if they cannot leverage on income out of advisory services.
  
• Benchmark Firms. The third type of niche players focus on providing benchmark services. These benchmarks can be quiet expensive in my experience and have thus typically only a positive business case in case of larger deals. And let most of the current deals now be smaller in size due to the reduced risk appetite of most companies wanting to outsource. So I expect also these companies to tighten their belt considerably and offering their services at a considerable discount to whether the current storm.

Supplier-dependent niche players
These advisory departments within the ITO/BPO/KPO vendors suffer the same symptoms as the one-stop-stop shop firms: they are not core business for the vendors and find it thus very hard to compete for business in a shrinking market. Besides a lack of dept in their propositions compared to the focussed boutique players have they to overcome the disadvantage of not being vendor independent. I expect these advisors will however be busy soon with ‘repairing’ governance and other issues coming out of some of the ‘speed sourcing’ deals which are signed these days.

The generic outlook for outsourcing related advisory services is gloomy for the short term, but there are exceptions. I know that some boutiques are very busy, especially those which can help companies to outsource quickly using proven best practises. The slumped demand for advisory services and resulting pressure of fees might also result in M&A activities as companies are relatively cheap now. An example is the recent take over by Datamonitor of Black Book research (after taking over niche sourcing advisory player Orbys). Like within every industry is the valuation of advisory firms searching for low points

Those who want to get some idea’s on lowering the risk profile of outsourcing deals which have to be signed in a pressure cooker can read this post.

Outlook for 2010 and 2011
This is where the crystal ball comes into play again, but here are some of my thoughts:

• I expect quiet some rework to be done on deals which have been rushed to the market and delivery been thrown over the wall to the vendor to get some free cash fast. So advisory companies which did not get stained by deals gone wrong should be able to capture some substantial revenue from mediation and renegotiation work. Same applies for advisory services related to insourcing/re-transition and supporting the migration from vendor A to vendor B.
• The sentiment of people active within the industry shows signs of improvement. For example the latest Black Book 'State of the Industry Report' points to restoring budgets, strategic outsourcing spending and a recovery in 2010 for suppliers that stayed customer-centric through the recession. With an improved confidence the risk appetite of companies is also likely to increase again, increasing the likelihood of companies engaging in complex or large outsourcing deals.
• I expect an increased level of commoditisation of sourcing advisory services, forcing boutique firms to come up with new, high added value services allowing them to continue charging their high fees. In the bottom range new (small) companies will enter the market which will compete for the smaller deals on price. As more people and companies gain experience with outsourcing, the total volume of sourcing advisory services will start to decline however. In that sense I expect fierce competition among these advisory forms to continue, even after the market has picket up momentum again.

All in all interesting times for advisory firms active within the sourcing industry and I would not be surprised if some smaller players will not make it to the end. For those firms investing in innovation and adjusting their business model to the needs of the market will be enough action to sustain a healthy business model.