This article originally appeared in Outsource Magazine Issue #26 Winter 2011
Scandinavia’s economies traditionally punch well above their weight in terms of innovation and quality – and it’s the same when it comes to outsourcing, with a growing number of organisations both embracing and refining the outsourcing model…
Mobile operator Telenor Sweden recently partnered up with IT services provider CSC in a five-year contract to outsource IT operations. Telenor began using CSC in 2010, and this new agreement suggests that they were pleased with the results. According to CSC, they’re adding a cloud computing capability to what they’ve been managing since the relationship began, which includes Telenor’s rating, billing, mediation and customer relationship management systems.
This agreement exemplifies the major outsourcing trend in Nordic region: ITO being boosted by an increasingly prominent savings agenda and by technological advances increasing the scope of what can be automated and outsourced. According the 2011 Nordic IT Services Analysis report from Ovum, this market is expected to grow to $19.6bn by 2015 as the result of a steady climb since a budget-tightening, recessionary dip to $17.8bn in 2010.
Getting to the core of the matter
The Nordics have proven their worth in the outsourcing market over the past couple of years in particular, though – contrary to what it may seem – outsourcing itself isn’t new to this part of the world. For example, the historically large Nordic manufacturing sector has been moving activities to countries such as China for some time, points out Ovum Senior Analyst Hansa Iyengar. But now, companies are finding the many other cost-saving benefits to shifting other areas of their business.
“Enterprises are now warming up to the idea of outsourcing non-core processes such as IT to help save cost as well as leave the management free to focus on core business areas,” says Iyengar.
“We have seen a wave of restructurings and renegotiations during the last couple of years, which boosts the statistics,” explains Jerry Runnquist, TPI Partner & Director for the Nordics. “In 2010 a few big restructurings took place as well. The Nordic region is now seeing a couple of first-time outsourcing deals emerging amongst the largest companies in the region.”
Confidence in using outsourcing has grown considerably during this time. Niclas Klintheim, CEO of Analyst Technologies Sverige AB, says that during the recent trend of companies shifting to outsourcing to unburden their balance sheet and save cost, executives became more knowledgeable about how to best use it to their advantage.
“Several companies have now been through their second and third round of outsourcing so CIOs have moved rapidly up the learning curve,” Klintheim says.
In an economic climate that has touched even wealthy regions like the Nordics, and forces companies to seek cost-saving measures and boost their principal functions, outsourcing is a logical next step – and in the Nordic region in particular, information technology seems to be where most people turn to first.
“Enterprises here are realising that outsourcing isn’t all bad, and that a vendor is able to provide the same, if not better, quality of services as an in-house IT department,” says Iyengar. “The main reason for the successful outsourcing model is that enterprises are not new to the concept; they have very clear roadmaps of where and what they want to outsource, and they are open to experimenting in terms of delivery models, solutions as well as providers, and are hence capable of finding the most viable option for their requirements.”
A satisfactory service
Nordic outsourcing describes activity in sectors across the board – it doesn’t centre on one industry in particular, though verticals that stand out slightly above others include manufacturing, financial and telecommunications. The global marketplace itself is of course a key driver in the wide variety of industries active in outsourcing: “Many of the companies are global, and so need to implement a global service delivery model that also encompasses global sourcing,” says Runnquist.
The public sector has been a little slower in coming around to outsourcing, but is now seeking ways to use it to their advantage – it’s worth some political points, at least.
“There have been active political signals to the public sector officials to take benefit from outsourcing,” Klintheim observes.
What each of these companies and organisations has in common is a high level of satisfaction with ITO. The 2011 Nordic Region Service Provider Performance and Satisfaction (SPPS) report from KPMG and EquaTerra, which focuses on ITO, found nearly half of the more than 300 organisations surveyed plan to outsource more. General satisfaction levels have increased from results in last year’s SPPS report.
Similarly, a series of country-specific reports from IT Sourcing Europe also shows positive IT outsourcing trends in the Nordic region. In Sweden, the number of companies that outsource versus the number that don’t is decreasing significantly. While the latter still lead, they do so by a 13.2 per cent margin in 2011 compared to 22.1 per cent in 2010. In the corresponding report on Finnish companies, more than 85 per cent of ITO service buyers use recommendations from their peers as the primary means of finding a provider, meaning it’s hugely important that providers keep up their good name and build a business-savvy USP.
Names in the game
With increasing opportunities for outsourcing within the Nordics, providers have a key growth area in which to compete. But it appears that, currently, this competition heavily favours India; those in the industry agree that – thanks in part to their ability to offer labour arbitrage gains to organisations used to paying wages that can be extremely high in comparison even with other western economies – Indian companies frequently come out top, and their assertiveness has awarded them significant market shares.
“The number of opportunities in the marketplace for service providers is very high, and the India pure players are many times on the winning side,” explains Niclas Sjöswärd, Senior Vice President of Strategy & Operational Excellence at Volvo Business Services. “Offshoring in ITO is part of every offer, and the percentage split between onshore/offshore is more and more aggressive – many times above 80 per cent offshoring.”
Klintheim identifies some of these key Indian suppliers as HCL and Tata Consultancy Services. Other ICT suppliers with a firm foothold in the Nordic region include companies such as Logica, IBM Global Business Services, HP, Capgemini, Tieto, CSC and EDB (Ergo group, SysTeam).
“The Nordic supplier Atea is the exception among local firms, and they gain market shares,” says Klintheim.
“Some offshoring goes to China and the Baltic countries,” he continues. “What level of outsourcing that goes offshore is not straightforward since several ‘local’ suppliers act, communicate and contract as local suppliers, but still shift quite a high number of the operations to an offshore location ‘internally’.”
Suppliers hoping to benefit from this trend are pureplay offshore venders like Infosys, Iyengar notices.
“They are rapidly expanding their presence here in anticipation of an increase in opportunities as well as to offer an on-shore delivery option to clients,” she explains.
It’s not just IT…
While ITO is a growth area that’s getting a significant amount of attention, other aspects of the Nordic outsourcing market are also thriving. BPO is still projected as the fastest-growing segment, fuelled by a competitive drive and increasing labour costs from a shortage of skilled manpower (Nordics Market Trends 2010: IT Services Analysis, Ovum). Meanwhile, the Nordics’ ever-faithful manufacturing sector is powering a lot of outsourcing growth.
“In manufacturing, we are seeing areas such as R&D, product development and prototyping being outsourced,” explains Iyengar. “The banking sector is expanding regionally (e.g., Swedish banks opening operations in Finland) which will bring about demand for systems integration and application services in the short term. And, the public sector is modernising their existing systems which will again push demand for ALO and BPO.”
F&A outsourcing is another rapidly developing sector. Sjöswärd explains how the recession perhaps led to the increase of activity here: “During the recession some companies (normally in bad financial shape) were actively exploiting BPO for mainly F&A outsourcing, and some actually moved into contracts with service providers.” Sjöswärd sees BPO as an as yet “immature” area in the Nordics, which could simply be down to an issue of what higher-ups are willing to let go of… “Senior management seems to regard back-office activities such as finance and HR as something they would like to have under their own control,” he says.
Enter SSC and cloud computing
Despite the growth in outsourcing volumes, shared services are often the more attractive option, Sjöswärd believes.
“The SSC concept is growing, and most companies in the Nordics have adopted more and more advanced internal SSC models,” he says. “For the larger companies in the Nordics the offshoring component is commonly used, but then again more as a solution component of the internal SSC set-up rather than outsourcing to a offshoring location.”
While there is a mix of growth and consolidation among suppliers, plus continued refinement of how outsourced services are delivered and the models used to remain competitive, cloud computing is adding a new dimension to the Nordic market.
“There is new competition from flexible and easy-to-use cloud computing services,” says Klintheim. This meets aspects of outsourcing agreements that executives may feel don’t meet their company’s needs – “for example, CRM where CIOs are not fully satisfied with the levels of flexibility you get with two-to-three-year SLA contracts, and an outsourcing partner that’s geographically distant (in India).”
Looking ahead, it’s not much of a surprise that in the face of an increasingly bleak global economy and reduced demand, the cost imperative will continue to drive trends over the coming months. While the Nordic region has largely escaped many of the negative effects of the recession other countries have seen, it is by no means immune – and if matters get significantly worse it’s unlikely that even such comparatively robustly performing economies will be able to avoid being dragged down at least a little of the way.
This perspective is of course also contributing to an upsurge in interest in outsourcing, as organisations hasten to ready themselves for the approaching storm (prevention being better than cure in business as in all else). Businesses willing to take risks, negotiate larger deals and let go of more operations that will still allow them to develop their core competencies, are likely to be those with greater agility and flexibility if the operating landscape becomes truly dire – and with such a comparatively high proportion of significant Nordic businesses also active in Europe and across the world, and consequently exposed to so many different economic dangers, agility and flexibility have perhaps never been so important.
About the Author
Elizabeth Leight is an editor and freelance journalist.