EDS (EDS: NYSE) was awarded a six-year, $92 million Medicare task order from the US Center for Medicare & Medicaid Services (CMS). The contract begins with a base period of one year with five extension options of one year each. Through the outsourcing contract, CMS aims to establish an improved system to file Medicare claims for its customers. In another deal, Unilever outsourced its European IT function and its HR services across the globe to Accenture while European financial transactional services were outsourced to IBM.

New trends setting in
In the recent months an increasing tendency to outsource all non-core activities and sign lower value deals has been observed. A growing number of companies are opting to outsource all non-core activities such as IT and HR. The obvious benefits offered by such deals are cost cutting and the benefit of leveraging the expertise of service providers. Outsourcing of non-core functions has become a lucrative option for the companies, as they are able to free up resources to concentrate on their core activities.

When Xansa signed the HR outsourcing deal with TSB Lloyds, its service centers located in India took over the responsibility to develop, host and support new recruitment and management information platforms and to transform HR processes. The service enabled the bank to enhance the technology platforms supporting its HR administration.

The outsourced functions are also assured of full justice as experts in the relevant fields handle them. The issues regarding data security have been resolved to some extent by vendors’ emphasis on providing data protection and conforming to IP laws. Vendors are becoming ever aware in the wake of stringent regulations, especially in the US, and have taken measures to implement international standards. This has also encouraged the outsourcing of sensitive non-core functions such as handling customer healthcare data and financial operations.

Lower Value Deals
The number of vendors available has gone up over the years. The increase in competition has fared well for the industry as service providers have worked on their abilities to provide better services and also value additions. The increased awareness for domain expertise and specialization amongst companies and vendors has increased efficiency. With multi-vendor outsourcing gaining popularity, a drop in mega-size deals was imminent.

As specialization goes up so does the need to be flexible. Companies are opting for more than one service provider as it also optimizes the risk. Other factors like difficulty in managing larger deals and the risk involved have also resulted in deals with multiple service providers. A single company may employ more than one service provider for a particular vertical, with each catering to a particular niche. The rise in the “hybrid” form of outsourcing – where more than one business model such as captive, third party, build-operate-transfer, etc is put in place - has also led to a lower number of mega-deals.

Enhanced learning for vendors
The acceptance of outsourcing as an essential part of corporate strategy is now being followed up with efforts to make the deals easier to implement. Outsourcing deals have ranged from purely voice-based services to knowledge-intensive and from large mega-buck deals to smaller ones with more specific demands. Vendors have often competed for deals while they have collaborated on others. The Indian outsourcing industry has thus evolved on account of very diverse experiences. While some deals stood the test of the times, others have been failures. But each eventually contributed to the learning curve.

 ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

No responsibility is accepted for errors of fact or opinion. Neither the analyst nor ValueNotes has a position in the stocks covered above, or has received any payment in any form for this report. ValueNotes does not own or trade in the stocks of companies under coverage. ValueNotes does not provide investment banking services or investor relations' services to preserve the independence of its research. Neither ValueNotes nor the analyst incurs any liability arising out of use of the above information/ report. Reproduction in whole or in part without written permission is prohibited.

ValueNotes Outsourcing Watch articles are distributed through FinancialWire, an independent, proprietary news service of Investrend Information, www.investrend.com

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