1. Investment Bankers Rule

We entered 2005 with the spin-off of Genpact, GE’s back-office arm with operations in India and other locations around the globe, and ended with acquisition reports surrounding two of the industry’s longtime leaders - Computer Sciences Corporation (CSC) and Affiliated Computer Services (ACS).

With growing customer demand for global solutions matched by aggressive growth plans by many providers, continuing high-levels of available capital for investment, the attractiveness of outsourcing’s recurring revenue streams, and strong industry revenue growth that slowed just slightly this year (see Outsourcing Grows), mergers, acquisitions, spinouts, public listings, and management buyouts across the outsourcing industry can be expected throughout 2006.

This is an important and positive development - not just for the companies and individuals involved, but for outsourcing as a whole. Why? It will mean that the operational, organizational, and financial elements of the outsourcing industry will all come into true alignment. The result will be more consistent performance and more robust and innovative customer solutions.

2. Security, Data Protection to the Forefront

While for providers of outsourced food services delivering innovative programs, high quality services, and guaranteed low costs are at the front of management’s attention, food safety is inviolable. Management at these companies knows that a single food safety incident can undo decades of exceptional customer service and innovative program development.

Increasingly, this realization is working its way across the rest of the outsourcing industry - particularly when it comes to ensuring the absolute integrity, protection, and security of customer data and, of course, of the customer’s customer data. These concerns came to a head in 2005 and, whether spurred by new regulation, legislation, or simply common sense, they will be a big part of the outsourcing story in 2006.

As outsourcing seeks to improve its brand image with the general public and many in the business, making security and data protection paramount is key and 2006 is the year for it to happen. By the way, one of IAOP’ Chapters is devoted to this topic. (See Data Security Chapter.)

3. Legislation Begins to Shape the Industry

Although none of the calls for legislation to out-and-out ban offshoring or offshore outsourcing ever gained wide legislative support, it would be a mistake to think that legislators are ignoring the concerns of their constituents.

The National Foundation for American Policy is currently tracking more than 100 state bills that would limit, restrict, regulate, or place special requirements on work done offshore. Although very few have become law and those that have are limited in their impact and have often backfired by producing higher costs and reduced services for the citizens themselves, these efforts cannot be ignored. With 2006's off- year elections these efforts could easily gain grater prominence.

Similar efforts at the Federal level have been fairly limited in their impact. Still the 2006 budget bills already passed have placed additional restrictions on ‘competitive sourcing’ of government work and the spending bill for the Defense Department includes a section that would not permit contractors to gain an advantage in their bids based on health insurance benefits savings. (See Congress Clamps a Lid on Outsourcing of Government Work.)

Although no single piece of legislation is likely to reshape the practice of outsourcing, the collective effect of the growing list of legislation and regulation will become an important part of the outsourcing landscape in the coming year.

4. Looking Both In and Beyond India and China

The importance of India and China to offshoring and offshore outsourcing, if not already secure, was certainly confirmed in 2005. As evidence, we saw major corporations expand operations there, such as Micosoft’s announcement of a $1.7 billion investment in its research and development and retail presence in India. (See Microsoft to invest $1.7 bln in India). At the same time, the importance of these countries as markets for outsourcing services grew as well, as demonstrated by HP’s second major outsourcing deal with an Indian bank, Bank of Baroda, coming on the heels of last year’s contract with the Bank of India.

However, momentum built throughout 2005 and will certainly continue strongly into 2006 for locations beyond India and China, in particular, Central and Eastern Europe, Russia, Latin America, the Philippines, Singapore, and Dubai. In fact, one of the ten fastest growing outsourcing companies has its major operations in Russia. (See Outsourcing Grows.) And, Dubai has quickly positioned itself as a high-end, high-skill offshore location perfectly positioned between Europe and Asia.

As for Central and Easter Europe, Genpact already has 550 people in its center in Budapest. An IBM study found that Hungary, Poland, and the Czech Republic ranked among the top 10 destinations for research and development jobs in the first half of 2005. Some 67% of the Polish economy is already in services. Hewlett-Packard has 1,000 employees in Warsaw and is opening another center in Wroclaw. (See Rise Of A Powerhouse.) Similar investments are underway in Latin America, where, for example, Brazil, Costa Rica, Mexico, and other countries are becoming well positioned as offshore destinations with unique time zone, language, and cost advantages.

5. Outsourcing Professionals Take Center Stage

At the risk of self-promotion, 2006 is also shaping up to be the year of the Outsourcing Professional. The International Association of Outsourcing Professionals (IAOP), which was launched in early 2005, already has almost 40 Corporate Members and close to 300 Professional Members. More than 37,000 professionals from around the world subscribe to its online magazine, www.firmbuilder.com.

With the support of professionals from around the world, IAOP developed and released the field’s first Ethical and Business Practice Standards in September, and the more robust Outsourcing Professional Standards, detailing the expertise and knowledge required of a certified professional, were released in December.

Because of this, the stage is now set for industry designation of Certified Outsourcing Professionals (COP) in early 2006. This certification will recognize individuals who have demonstrated the capability to design, implement, and manage outsourcing contracts that have a high probability of achieving their intended results – addressing a real credibility gap the industry currently faces. This, combined with induction of the first individuals into the Outsourcing Hall of Fame, will go along way toward making 2006 the year of the Outsourcing Professional.

Outsourcing services could directly employ 2.3m by 2010

India could earn $60bn a year by 2010 from information technology and outsourcing, an industry report says.

The report was prepared by Nasscom, a lobby firm for Indian software and service companies, and international consulting firm McKinsey and Company.

It said business worth $110bn would be outsourced worldwide by 2010 and India is set to capture more than half of it.

But the report said more investment was needed in developing skills and infrastructure to achieve the goals.

'Knowledge cities'

Most of the new business is expected to be outsourced by insurance, retail, banking and travel companies, the report said.

India's IT and outsourcing sector is currently worth about $22bn and expected to grow by 25% until the end of the decade, it said.

The forecast also predicted the sector could directly employ about 2.3m workers by 2010, compared to 700,000 now, but projected a shortfall of 500,000 skilled workers.

Indirect employment was also set to nearly treble to 6.5m in the next five years as software and customer services were outsourced to India, it said.

The report urged the creation of at least 10 "knowledge cities" with their own airports, roads, office space and housing facilities to meet the needs of technology firms.