February 15, 2011

Innovation will be the main focus of the outsourcing segment in the coming year, according to the law firm Morrison & Foerster in its annual assessment.

The global economy began its recovery in 2010, but was less robust than expected. Circumstances such as high unemployment in the U.S. and the near bankruptcy of a number of European countries left outsourcing buyers unsure about the value of entering into long-term outsourcing arrangements.

Innovation in outsourcing is now back on the agenda. As was the case prerecession, organizations are beginning to expect more from an outsourcing than simply cost-cutting. But the obstacles to the successful achievement of innovation remain the same as they have always been: service provider selection, contracting for innovation, and paying for innovation.

Cloud security an issue. Cloud-based solutions continue to grow in importance in the outsourcing market but concerns about data security and data privacy in the cloud remain high. Customers are now demanding that security be built into cloud services, and the market is driving the emergence of highly secure and trusted cloud services. “Private Clouds” have gained popularity, especially in regulated industries where security and risk concerns may deter companies and their regulators from moving to genuine “public clouds”.

The worlds of outsourcing and financial services regulation will continue to intertwine ever closer. Capital adequacy requirements for banks and insurance companies imposed through Basel II implementation and forthcoming Solvency II and Basel III requirements will change the outsourcing market. If adopted as market practice, these changes may then spread outside the financial services sector. Most immediately, there will be increased emphasis on counterparty risk and the effect on banks’ and insurers’ capital; and more interest from regulators in outsourcing service providers.

Efficiency gets meaningful. Outsourcing by financial institutions bounced back in 2010 in large part because of the restructuring of a number of large IT deals.

Organizations are beginning to do more than merely pay lip service to the implementation of efficient energy and resource use. Morrison & Foerster is seeing buyers apply energy usage as an evaluation factor in service quality and total cost of ownership calculations; and clients are starting to discuss meaningful service levels around “green” issues. This is an early-stage trend that will increase in 2011, driven by financial reporting requirements, increasing energy costs and, in some countries, statutory requirements.

Read the report at http://www.mofo.com/files/Uploads/Images/110118-Global-Sourcing-Trends.pdf.