While US firms pioneered outsourcing, it's in Europe where the methodologies and practices are reaching maturity. So much so that Europe is now the leading outsourcing region in the world. Manuel Ceva, Vice-President, Equant Global Solutions, Equant, explains why
Analysts for once are in agreement -
Europe has become the world's fastest growing market for outsourcing. Most recently, IDC reported that Europe captured more of the Top 100 outsourcing deals than the US did during 2004.
The growth in large deals, from $48 million in 2002 to $66 million in 2003 was driven by Europe's newfound interest in outsourcing non-core activities such as communications and application development.
And US outsourcing advisors TPI, also acknowledged that Europe was in the ascendancy.
It claimed that in 2003, the US accounted for 47% of global outsourcing revenues, with the EU at 41%. By 2004, the EU accounted for 49% of total outsourcing business, while the US had slumped to 44%.
This should be put in perspective of the overall market for IT services, of which Europe accounts for less than one third - around 30%.
Gartner is equally positive on European outsourcing, predicting IT outsourcing in particular, growing at 7.6% a year and reaching $63 billion in service revenues by 2007.
Dominating the activity will be data centre, network, applications and desktop outsourcing. Selective outsourcing is rapidly replacing the mega-deals as focus of the IT services industry.
Why Europe now?
It should be no great surprise that Europe is fairing well in outsourcing. While the US invented the concept and practice, developing outsourcing during the 1970s and 1980s, it was also responsible for much of the hype and some of the consequent backlash.
In particular, the flurry of mega-deals is now over: most organizations recognize that no single partner can provide a comprehensive IT solution from application development and management to communications and the desktop.
Europe is now taking over the outsourcing leadership. Boards of large European firms are recognizing that outsourcing can work well with a specialist partner. Consequently, firms concentrating on communications, call centre or desktop outsourcing, are increasingly succeeding where mega-deals have become less popular.
Europe was not always a prime location for outsourcing. Labor laws in many countries such as France and Germany, precluded the rapid reassignment of staffing resources - i.e. redundancy - that US firms have been able to pursue.
Europe is also typically a second-mover when it comes to IT.
Four drivers
But four drivers have converged to propel Europe to the top in outsourcing growth.
Firstly is the level of complexity among modern organizations. Europe's leading multinational companies (MNCs) are expanding, acquiring and merging with other businesses. The downside is the number of staff, devices and functions needing support can spiral out of control.
By choosing an operational support partner, the firms can achieve their goal of lower overheads while focusing their attentions on growth.
Instead of dealing with hundreds of suppliers and contracts, a single task specialist, can aggregate the responsibilities and deliver a simple, unified service back to the client.
Secondly, European companies by their very nature, tend to be more cross-boarder than US companies. While many US firms are domestically focused, it is quite common for European organizations to derive the majority of their revenues from foreign markets.
The downside of this is that it can be a challenge providing back office infrastructure in every country they operate.
The US, on the other hand, is a single market roughly equal in size to the whole of the EU. Large US firms can often find sufficient scale to provision customer care or IT services in house in an efficient manner, where European companies must deal with cultural, trade and market differences.
Thirdly, European outsourcing is booming because there is a growing acceptance among unions and labour organizations that outsourcing is not necessarily a bad thing. The more flexible the workforce, the less likely the jobs are outsourced overseas, and for many outsourcing contracts, staff are directly co-opted into the outsourcer on better terms.
Many European companies have labor representatives on the boards so this has been an important conclusion that has resulted in greater corporate flexibility in the consideration of outsourcing options.
And finally, outsourcing practices and methodologies are reaching maturity. More executives in more organizations have been through outsourcing processes, on both sides of the fence.
The recognition that mega-deals don't always work has been replaced by more selective outsourcing. And many organizations are better geared to identify what they want outsourced, how to chose an ideal partner, and how to measure a project's success.
Technology refresh, for instance, was one of the most common sticking points in the past; now it is high on the priority list when defining the outsourcing project.
Good management of both parties' expectations has been one of the reasons for recent European outsourcing project successes.
Another factor is that Europe's own outsourcers are reaching maturity. IT services firms in Europe such as ATOS Origin, Capgemini and BPO firms like Capita are now competing fiercely with US organizations, while communications service providers such as Equant have been steadily building their experience and professional services personnel and proving that communications outsourcing is best left to a communications expert.
This article was authored by Equant.com, 01/2006. To find out more about how you can benefit from Communications Outsourcing you may download Equant's brochure.
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