A nice article in the latest FAO Today by David I. Sheinfeld on The Commoditization of F&A Outsourcing. His observations obviously apply to all the traditional service lines in both ITO and horizontal BPO.
As clients show more inclination to break up the contract scope and use more than one provider, there are fewer margin dollars and less opportunity to recoup any start-up losses that occur during the term of the contract. Furthermore, with smaller contracts in place, there is a greater emphasis by the outsourcing company to avoid transition and start-up costs, as the ability to recoup those costs becomes that much more difficult. The new contracts may also require more services or other value-added solutions that increase not only the requirements under the terms of the agreement but also the risk to perform. Thus, the provider needs to be prepared to give more for less.
The critical dynamic here is going to be how quickly the outsourcing elephants learn to dance by embracing emerging BPO solutions, utility ITO solutions and vertical solution platforms. Low cost is still a driver for customers, but, increasingly, it is not THE driver. There are far too many quick and nimble niche/boutique players in global OS that want to get big, fast and are willing to reduce margins (because they can) to achieve market penetration.