Editor’s Note:  Further to our first Crystal Ball 2012

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by Minacs CEO, Deepak Patel, we continue the series as we step into a new year. Look out for more Minacs leaders sharing thoughts on business trends and the outsourcing industry through 2012. Here, Milind Godbole kicks off the new year with his predictions and what must be done to capitalize on them.

My thoughts on what new directions the outsourcing industry will take in 2012 start with an analysis of the overall state of businesses today as driven by the global economy and market forces. In a world of widespread and deep change, customers are at different stages of determining what they need. The outsourcing industry must therefore listen all the more closely to their clients to be able to deliver what they are asking for, bringing innovative approaches to the achievement of their goals.

As the global economy continues to be in a chronic state of “stagnation”, if not outright recession, there will be pockets of growth across select markets and companies. While some of them will grow, some will stagnate, and some will de-grow.

In such a scenario, I believe that our buy-side enterprises will continue to outsource in order to “variable-ize” their cost structures. In their effort to become more agile and to accelerate growth in a tough market, what is going to be different, however, is that they will redefine what is “core” to their businesses leading to the outsourcing of more activities.

We are already seeing that the “Outsourcing = Offshoring” concept is dying. I see more onshore and near shore outsourcing taking further root during 2012. Partly, this is due to the outsourcing of more “difficult” activities that require more domain knowledge (which is why they were earlier considered core competencies by enterprises and hence performed in-house). Servicing these outsourced processes from on-/near shore locations helps to mitigate risk perceptions in new, higher value, functions.

Also, as organizations enter new markets (e.g. CEE, BRIC, and other emerging APAC markets), the servicing of those markets will happen locally (albeit delivered to global standards). Conducting business in local languages and understanding the local cultural and business nuances will be a key to growth.

While buyers will also look at consolidating their supplier base, the outsourcing industry itself will also continue its M&A trajectory, looking to add more capabilities and offerings to their portfolios. Their inorganic growth will especially seek high-value, non-voice functions – to support their clients’ need to seek more Core Sourcing as mentioned above. However, the time taken to realize the desired returns from these deals will be much longer. As such, it will be important for players to strike the right balance between their go to market and integration activities to reduce this time lag.

Organically, from a service delivery standpoint, providers will have to invest in platform automation. Additionally, as outsourcing buyers seek more value from their vendor relationships, it will be imperative for service providers to adopt a “value partnering” approach and get their “skin in the game”. They must focus on realizing business outcomes for clients by working with them on gain share engagement models that enable them to be more reassured in outsourcing larger value chains than before.

As a practitioner, I see that Tier 2 outsourcing services players have much to offer and they will continue to compete effectively with larger players. By living the “DNA” of their client organizations they will carve out a strong niche for themselves. This includes being more client-centered and “hungry” – to continue to provide clients exactly the kind of flexibility and innovativeness that is needed today.

With enterprises hoping to accelerate their business and enter new markets in search of growth (a point I was making earlier), they will look for “experts” with whom they can partner. These experts will not only be expected to understand the client’s business, but also the local markets (Tier 3 and Tier 4 towns) in which they operate. Larger providers may find it difficult to offer this kind of local market expertise and the quick time to market that the more specialized Tier 2 players can offer. I suspect you may see more alliances between Tier 1 and Tier 2 players to better service client needs.

Exciting times lie ahead for the outsourcing industry. How practitioners capitalize on the opportunities and challenges that the market and clients throw at us, will determine our future well into 2012 and beyond.