Frost & Sullivan, which released results of its market study last week, said growth in the SSO market would be underpinned by the quest by companies to reduce costs. The study outlines the global SSO activity across seven major industry verticals based on a survey of Fortune 500 and Forbes 2000 companies.
The top vertical by SSO spending in 2006 was the banking, financial services and insurance (BFSI) sector at US$273 billion. The technology/ICT sector was the second biggest spender at US$233 billion, while the healthcare industry spent an estimated US$130 billion on SSO. The BFSI and technology verticals together constituted over 50% of the total spend on SSO last year.
The other verticals covered include transportation and logistics (US$113 billion), energy (US$84 billion), fast-moving consumer goods (FMCG - US$59 billion), and media and entertainment (US$39 billion).
“Based on our study, one of the African countries that have surfaced among the top 10 hubs is South Africa. South Africa ranked as the eighth most attractive location for SSO (shared services and outsourcing) hubbing in the transportation and logistics vertical,” Kam Soon Siew, consulting director (Asia Pacific), for Frost & Sullivan, told BizCommunity in an emailed response to questions.
“This endorsement is validated by Lufthansa's shared services centre, Volkswagen's logistics supply chain hub, and BAX Global's HR and finance shared services centre located in Cape Town, Uitenhage (Eastern Cape) and Gauteng Province,” Siew said.
He said from being just a call centre hub, South Africa has matured into one of the leading outsourcing hubs, as seen by Computer Sciences Corporation's (CSC) operation in Cape Town.
Largely driven by the quality of information technology (IT) skills and productivity ethics, CSC's operation in South Africa has been positioned as a key provider of offshore services to its clients around the world as a result of the company's Global Transformation Solutions ‘world sourcing' strategy.
“Another testimony is energy giant Chevron's Pan-African HR shared services centre in South Africa that supports seven African countries. The HR shared services provided include HR data maintenance, recruiting, expatriate administration and compensation and benefits,” Siew said.
The global SSO study reveals that India remains the top destination for SSO operations across these seven verticals, followed by China, Ireland, Singapore, Malaysia, Mexico, Czech Republic, Poland, the Philippines and Canada. Emerging destinations for specialised functions include Russia for high-end software development and Dubai for BFSI services.
Key factors in determining the choice of location include costs, availability of skills and IP regulations. Inherent factors such as low labour costs and an abundant supply of skilled labour have ensured that India is a prominent top-of-the-mind location for SSO investments. India's SSO market is now experiencing consolidation and SSO providers are maturing and moving up the value chain, expanding their onshore presence to strengthen their global delivery capabilities.
”India is, however, facing a threat from China. The Indian market is beleaguered by high attrition rates, poor infrastructure, rising wages, and the appreciation of the Indian rupee against the US dollar. China is therefore quickly emerging as an attractive location for outsourcing IT, R&D and procurement services,” says Frost & Sullivan.
Their study reveals that the key drivers for SSO continue to be cost benefits through standardisation, leveraging benefits of scale, and cost arbitrage. The study also observes that SSO operations, which are an integral part of business architecture, need to adapt to vertical specialisation models for businesses to achieve higher productivity and profitability.
Verticals such as transportation and logistics, energy, FMCG, and media and entertainment, for example, have developed effective SSO operating models for non-core functions such as IT services, finance and accounting, HR services, procurement, customer support and call centres.
“Sectors like healthcare even outsource core research and development (R&D) functions, and this is likely to continue for a few years as healthcare companies try to find new drugs and reduce operating costs,” the study notes.
“While the captive model and the third party models have become dominant, increasing instances of hybrid models involving equity participation, joint ventures and project funding are noted to be on the rise.”
“SSO is no longer just about cost arbitrage,” says Frost & Sullivan.
