The recession and its impact on Canadian outsourcing

A summary from the research conducted by IDC, CORE and PRIMA

By Staff
October 1, 2009

The Canadian outsourcing market averages about $5 to $6 billion annually, with an estimated minimum of $57 billion in outsourcing contracts signed since 1998. The Canadian outsourcing market grew significantly following the 2001 recession as Canadian companies looked for new ways to reduce operating costs and focus on their core business operations. Following a period of rapid market growth in 2002 and 2003, the Canadian market flattened. However, it appears poised to grow rapidly once again, beginning later in 2009 and into 2010, based on stated intentions of buyers and recent growth in the deal pipelines of service providers.

During March and through June of 2009, a consortium of organizations including IDC, The Centre for Outsourcing Research and Education and Prima Management Consulting undertook a study to assess the impact of the current recession on the demand for Canadian outsourcing services. The study included a survey of about 200 Canadian chief executives, selected procurement executives, outsourcing advisory firms and most major service providers in Canada. The study also included one-on-one interviews with senior outsourcing executives. The study assessed the market expectations and outsourcing intentions of companies and compared these to the market patterns following the 2001 recession.

Market observations
The study found that the current recession is stimulating outsourcing demand, acting as a catalyst to accelerate trends already present (deals narrower in scope, more examination of off-shore, and so on). Canadian business executives see outsourcing as one of the best ways to attain sustained cost reduction. Canadian providers of outsourcing services are reporting their pipeline of opportunities has risen by approximately 25 per cent on average over the same period last year.

Increased market demand for outsourcing services is being driven primarily as a key part of clients’ cost-reduction strategies. Executives see outsourcing as the best way to reduce their IT costs. Unlike the post-2001 recession market activity, renewals and renegotiations have been about 50 per cent of the deal mix to date, versus 30 per cent post 2001, as existing contracts are re-opened or re-negotiated to find cost reductions and efficiencies. However, there is also growing interest amongst companies that have not undertaken much if any outsourcing activity to date. Those that have been active outsourcers in the past are looking to broaden the scope of business functions that they outsource, moving beyond outsourcing IT infrastructure and applications to consider outsourcing selected business processes.

Future market
New deal volumes are expected to increase through late 2009 and through 2010. Increased adoption in the use of off-shore resources is expected to create permanent shifts in the market as clients grow more accustomed to the use of off-shore resources. Not surprisingly, those sectors of the economy generating the greatest interest in outsourcing are industries hardest hit by the recession, such as financial services, retail and manufacturing. Other factors such as the shifting role of the office of the CIO and the move toward cloud computing are also more fundamental factors driving long term growth trends in outsourcing demand.

Going forward
The study found that while outsourcing typically can provide significant reductions to a company’s operating costs, cost reduction alone should not be the only driver. The decision to outsource should properly be considered in the context of the company’s overall business strategy. For many companies the current recession has been deeper and more severe than those previous, causing many companies to fundamentally rethink their business strategy as they prepare for a post-recession economy. For service providers and clients alike, this means finding ways to create effective business partnerships that remain flexible and take the long-term view, rather than just a short-term approach to cost reduction.

CORE (Centre for Outsourcing Research and Education)

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Relationship management

An appropriate governance structure leads to outsourcing success at Miller Thomson

When two or more businesses agree to enter an outsourcing agreement, one of the most important issues to be addressed is the establishment of an appropriate governance structure. According to Fraser Mann, Partner with Miller Thomson’s IP/IT Group, the governance structure should allocate responsibilities, create clear channels of communication, establish proper mechanisms for dealing with change and set up ongoing performance reviews. “The goal is to meet the business needs of the parties and establish objectives that they are trying to achieve,” he says.

Within the governance structure, it is recommended to set up at least three working committees with varying degrees of responsibility.

1. Senior Executive Committee:
This group should be led by a senior management representative from each party and could also include a few other senior management personnel with varying roles and specific expertise. It will function as the oversight body, at the management level, for the outsourcing relationship.

Responsibilities: Establish strategic direction of the relationship, oversee budgetary approvals, approve the overall performance measurement framework, deal with disputes and/or issues in the relationship.

Meetings: Consider convening bi-monthly (or more frequently if requested, especially during the start-up phase).

2. Management (mid-level) Committee: This group provides advisory support to the senior committee. It should consist of management from both parties and be led by the parties’ executive sponsors of the outsourcing relationship.

Responsibilities: Develop a long-term business plan, decide on priorities among various projects as part of the outsourcing relationship, review service levels, look for new business opportunities within the context of the arrangement.

Meetings: Meetings should normally be held on a monthly basis.

3. Operations Committee: This is an on-the-ground committee, responsible for the day-to-day operations. The employees of the two organizations responsible for managing the relationship between the outsourcing parties should be the co-chairs. It could also include technical resources as well as representatives dealing with specific aspects of the outsourcing relationship.

Responsibilities: Manage the “change management” process to ensure changes are properly approved and the implications of changes are fully considered and addressed, ensure a “problem-resolution” process is in place and oversee the resolution of any issues that may arise, decide what information will be escalated to the other committees.

Meetings: Convene on a weekly basis.

“In addition to these committees, it is important to identify other roles within the governance structure,” says Mann. Consider having someone who has overall responsibility for the ‘transition-in’ process. “This means, assign one resource to ensure everything that needs to be done to implement the outsourcing relationship is occurring upfront.” Then, consider assigning specific individuals to oversee problem management and dedicate other resources to oversee the requirements of the deal.

“Another thing to consider is the reporting structure,” says Mann. “In other words, identifying what reports are to be provided and how frequently they are to be provided, and what supporting documentation goes with each report.” Typically the governance structure will be attached as a schedule to the agreement, which will detail all requisite parameters.

Mann says: “The primary risk of not establishing a formalized governance structure up front is that there will be a lot of uncertainty as to who is responsible for what and the project may go off-track because business needs will not be met and disputes could arise as a result.”

Though it is not complicated to put down on paper what a good governance structure is, Mann advises the challenge comes in making this governance part of each business’ corporate culture. “We have to go through, with all parties, what they need in order to implement this business structure.”
Miller Thomson

Visit our website at www.millerthomson.com for information about our firm and the services we provide. 

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