With those parameters in mind, here are the top six issues to watch in services sourcing in the months ahead. We know these are already on the minds of many corporate executives.

1.   A desire to address the global dimension of the business strategy – i.e, the land of tomorrow’s customer:  More companies are talking about outsourcing and offshoring — almost interchangeably — as part of an overall globalization agenda.  Cost savings still matter, of course, but the desire to participate in emerging new economies is also gaining import.  This, in turn, is affecting the time horizon of the initiatives.

2.   A growing preference for selecting sourcing alternatives within the context of a multi-year strategic agenda. We’re already seeing fewer acts of desperation in the sourcing initiatives being launched. To many of us, this implies that the low-hanging fruit of labor-based sourcing has been harvested.  Companies are now looking for more partnership-minded relationships. (Yeah, many of the words are the same, but the contracting tactics differ).

3.   A push to evaluate sourcing options through the 3C paradigm; total value orientation. I’ll write more about the “3C Framework for Sourcing” in a coming post, but suffice to say it’s the balanced consideration of costs/capability/capacity.  The prior overemphasis on near-term cost reduction is giving way to a new equilibrium.  Providers that won under the former rules may not be positioned for the future orientation toward total value.

4.   Assessment of existing service delivery relationships for alignment with strategic direction – i.e., not a tactical move. Many of our clients tell us that they have awoken to find a veritable nest of service provider contracts existing within their companies. It seems that each business unit and corporate function has two to three different providers doing work for them. A serious rationalization is in the offing for the coming quarters, with a weeding out of the cost-only providers for those that align with the strategic direction of the client. This, of course, gives rise to …

5.   Considering outsourcing options for all technology-enabled, people-intensive work processes i.e, go big and fast. Looking hard at work and asking whether activities couldn’t benefit from scale and automation. We’re seeing wall-to-wall reviews of work processes and serious scrutiny of the efficiency of the delivery models. There is no slowdown in the consideration of sourcing alternatives.

6.  Looking at the role and value of captive offshore operations. Captive centers are showing great value, and we see expansion plans being deployed for those operations in the coming quarters.  While the make-versus-buy decision is complex, we’re sensing a continued desire to move knowledge-based work to locations that offer lower costs and greater capacity, with equal or better capability.  Look for a continued desire of some larger conglomerates to monetize their captive operations, but those will be a handful, at best.

Which is fine. But first a couple of points: From the earliest days of outsourcing there have always been third parties involved in processing client information. More to the point, data breaches can and do happen with in-house operations, too.

Still, the data issue is gaining traction in light of legislation aimed at protecting financial and medical data. Both clients and providers are feeling the heat.

The sourcing industry has already adopted safeguards and best practices to protect information, but the question remains in the mind of many: Does sourcing mitigate or exacerbate data risks?

Companies are calling us seeking advice on the capabilities of service providers to help reduce the perceived risks relating to data protection. At the same time, providers are starting to squirm at contractual terms aimed at allocated damages due to breeches in data security policies.

We shall see whether the sourcing industry is a source of extra risk or solution. But there are two things we already know: Whether data are processed in country or offshore doesn’t matter, so don’t believe in headlines about “outsourcing” as a culprit. And the market can and will play a regulatory role, as it always has, because reputations and bottom lines will suffer if customers suffer.

In today’s “multi-sourcing” marketplace, organizations seeking the best service often break into parts what had been a harmonious business operation, particularly in the IT space. They do this in order to achieve focus and efficiency in the management of various elements of technology services.  The challenge for the executive overseeing the sourcing relations: How to maintain a high level of service across the process now that you’ve got myriad providers – including both internal and external teams – doing the job?

Said differently, the benefits of cost efficiency can erode quickly if the result is increased risk of disintegration.

I tend to agree that fracturing a business operation (such as claims processing, order management, settlement reconciliation, or even accounts receivable management) across many different service providers invites some real risks. Indeed, we tell our clients that job No. 1 is maintaining integrity across the service chain.

This demands that the architects of the sourcing strategy think both horizontally (that is, within a service category like servers, or help desk, or networks) and vertically (e.g., a business process such as claims administration, order management, and the like).

Companies often ask us about using contractual mechanisms to manage and mitigate the risks of divvying up responsibilities among multiple providers. We tell them from the beginning that service providers generally aren’t keen to sign “end-to-end” service-level agreements (SLAs), because the providers are rarely responsible for each and every service element in the chain.

That said, a well-designed sourcing strategy can help achieve the desired results. The goal is not to push providers to be responsible for service elements outside their direct control but rather insist that they are at least responsible for managing those service elements on the client’s behalf. They need to play as good citizens and have skin in the game.

You need structure. That means baselining the service levels expected so that providers can measure and manage them. It also entails applying certain rules of the road for being a provider within the corporate family.  There are ways to achieve integrity and responsiveness without prescribing each situation via contractual terms.

It’s less about gaining confidence because of an elegant contractual framework than it is about setting the tone and tempo of operational cooperation within the governance mantra of the participating organizations.

Providers got over $15 billion of total contract value (TCV) in October, the highest TCV tally for a single month in the past two years and almost twice the TCV as the next highest month. Three mega deals accounted for almost $8 billion of the TCV, and one — IBM and AT&T – accounted for $5 billion. Business-process deals figured prominently in the month.

November doesn’t look nearly as good, but more about that month in a moment.

India-based service providers inked several mega relationships in October, in keeping with a recent trend: While many consider 2005’s ABN Amro/TCS/Infosys deal as the high-water mark for Indian providers, since then we’ve seen these providers expand their client list to other large customers. And, in some cases they have done so without employing the relatively slower “penetrate and radiate” method that involves getting a foot in the door then selling the client more services over time. Rather, the India-based providers are showing their ability to win some truly big deals.

While the Indian providers may still be buying market shares (think deals like TCS-Pearl, Genpact-Citigroup and Philips-Infosys) or winning business with a long-time captive client (BT-Tech Mahindra), they also are starting to compete and sometimes win on very large deals that don’t involve clients they’re already working with.

The next trend to surface may find smaller India-based service providers (EXLService, FirstSource, WNS, HCL) starting to look outside their captive client base for a big deal.

Now the cautionary kicker: We have not seen many deals in November, and if this month and December revert to the pattern of the rest of 2007, October could prove to be a blip.

Look for lots more detail when TPI hosts its next Index call in January.

There are tons of books on offshoring and global services delivery. Some address up-and-coming offshoring countries that have the education, labor arbitrage and political stability to move your organization to the next level. Some help you define your service delivery framework, others tell you how to conduct an RFP process, and yet others guide you in managing your sourcing relationships. However, this is the first book that I’ve seen that is a resource and reference tool to apply project management to an offshore component.

Overseeing a project management team in which some members are offshore is much different than traditional project management. This book is a practical “how to,” offering sound project management principles to help the software development managers to best execute development when its people are all over the globe. I’d recommend Managing Global Development Risk to anyone in the sourcing community that wants the tools, techniques, and knowledge necessary to achieve project success with offshore resources.

Congratulations Jim and Steve on a job well done!

The relatively standard processes imply that technology can lend a big hand as long as the people who perform those F&A functions have a fair degree of functional expertise and conform to common processes.  That said, tax complexities, revenue-recognition policies, industry specific requirements among other factors present challenges, but these issues are almost always under the watchful eye of an executive who is highly motivated to achieve the desired accuracy and compliance.

Now contrast this situation with what you see in most Human Resources departments of organizations where it’s not uncommon to find many nuances relating to the geography, business-unit operating models, and various employee programs. One might think that achieving common ways of doing things in HR would be more problematic.

The difference between the two functions raises the question: Why is it that the predominant sourcing model for F&A is labor arbitrage? We see much more standardization and “managed services” orientation in HR outsourcing than we do for F&A functions. Whether companies are using a captive operation or outsourcing, F&A has become the poster child for effort-based sourcing.

So far, the promise of a vibrant market for F&A outsourcing is unfulfilled. The contracts are labor-oriented and the investments made by many of the leading service providers to standardize offerings aren’t being employed. Which leads one to ask: What will it take to change this? Why aren’t CFOs more receptive to a managed service around accounts payable? Might this be a situation whereby service providers are not providing comprehensive solutions to F&A executives? Perhaps it a case where finance managers cannot relate to “managed services” offerings? Or maybe it’s a relatively higher degree of integration among and between finance processes that is making standardization so elusive?

Whatever the cause, today’s outsourcing landscape offers a much higher degree of maturity for HR services than F&A services. Is the lure of cheap labor so compelling that the promise of a managed service for F&A is just not worth the effort?

The paradox here is the continued strength in the flow of work to India-led providers. You can see that from the providers’ earnings reports. My firm thinks clients are opting for effort-based contracts – paying per worker per hour — rather than traditional outsourcing relationships that specify the scope and quality of services.

Watch the news in the coming weeks, and I’ll bet you start to see a renewed emphasis on productivity-based and outcome-oriented contracting. The provider community has the expertise and the tools to deliver great value to clients through real outsourcing, but they must surrender the old ways of selling effort. They have to paint houses like pros.That said, potential purchasers of sourcing will likely be cynical about such quick cycles in business models. Just as they were getting comfortable contracting for people in low-cost destinations, the business model will change to reflect the rising tide of labor costs influenced by currency exchange rates, taxation policies and rising wages. The prospect of higher labor costs for effort-based contracting won’t be very appealing.

I expect outsourcing demand to suffer from these shifts for a while, at least until we converge on a sustainable business model that blends cost, capacity, and capability. That’s the model that will create long-term value.

Author Jeff Howe (http://www.wired.com/wired/archive/14.06/crowds.html) characterizes this phenom as distributed labor networks using the Internet to exploit the spare processing power of millions of human brains, much the same way that dispersed computing projects harness the processing might of millions of chips.

MySpace, eBay, Wikipedia, and the vast universe of Linux developers further illustrate the power of crowds properly organized. Howe’s article makes the point that these Web initiatives – previously taboo with old-line businesses – now realize that technological advances are allowing them to source to anyone connected to the proverbial network.

At the same time, such advances are dissolving the cost barriers that once separated amateurs from professionals. Now all the diverse folks who make up the crowd can connect with companies in everything from pharmaceuticals to television. Hobbyists, part-timers, and dabblers have a new source of income, and businesses have a new, cheaper, and often more inventive source of solutions.

I get asked whether this Web 2.0 model is taking root at larger companies with serious business processes. Answer: Not yet, anyway.

“The Wisdom of Crowds,” a deservedly popular collection of work by New Yorker writer James Surowiecki explains that for the crowd to be wise, four conditions must exist: diversity of opinion, independence of members from one another, a specific kind of decentralization, and a good method for aggregating opinions.

Similarly, Howe highlights what he sees as the “Five Rules of the New Labor Pool”: The crowd is dispersed. It has a short attention span. It is full of specialists. The crowd produces mostly crap – but also finds the best stuff.

I believe most serious corporate executives aren’t yet ready to let the crowd sort the good from the crap. But I still think it’s worth watching the crowd.

These same commentators don’t seem to have the numbers to back up their pronouncements, but let’s agree that much smoke has been created around this topic. There’s even some fire. Except it doesn’t always – or even frequently – start where you might think. And it doesn’t have to burn down the house.

Conversations with many experienced client executives – the people who manage active outsourcing arrangements – do reveal some ongoing “fire fighting” in their relationships. The causes and severity vary, but one theme typically emerges: Most clients just aren’t equipped to manage all the dimensions of commercial outsourcing arrangements.

In fact, the skill sets and nuances required go well beyond what you need for standard contract management. And even if a client has the DNA for the job, he or she may not have the tools to stay on top of the relation and make it produce results beyond the basic service being provided.

Service providers heartily agree. They document how clients and providers enter into a relationship whose complexity may not be understood up front. That builds up stress over time as expectations don’t match and the stuff that really matters – and that may not be in the contract – gets ignored.

We recently were asked to measure several client governance teams to see how well they performed the essential activities that contribute to a healthy buyer-provider relationship. Participants were able to benchmark their organizations with those of their peers. At the risk of fanning flames, here are some results:

• Only 19% of clients feel they provide enough training for members of their governance organization
• Only 25% of clients did a formal assessment of the skills and capabilities of their original governance team members against a defined job description for the new role
• Only 10% of clients have intra-company best-practice forums for outsourcing management (suggesting that most activities are “stove piped” and re-created multiple times across a company)
• 60% of clients believe their internal organization is as much to blame or more so for root causes of outsourcing dissatisfaction (versus dissatisfaction caused by the service provider)

What this tells us is that the time has come for the science of governance over outsourcing relationships to become more prominent. We all know that service providers sometimes don’t measure up. But we also are learning that clients need to be accountable in managing their relationships if they want to move from the role of fire douser to a position of leadership supporting innovation.

TPI’s Governance Excellence Program, including the benchmarking facet, is described here [http://www.tpi.net/knowledgecenter/governanceexcellence/] for anyone interested in learning more.

Gone are the days when CIOs were judged solely on their ability to deliver and maintain new systems. Now the performance review measures whether the CIO can balance a technology strategy with a comprehensive “resourcing” plan to deliver the Three Cs: topflight Capabilities, desired Capacity and best Cost.

Few companies believe they can get all three without turning to outside providers, which is how CIOs took on the extra responsibility of managing a portfolio of external resources.From my vantage, the progressive CIOs are dedicating significant time to their resourcing strategies, trying to get everything in line with the overall business plan.

Any astute CIO knows that outsourcing has to be considered as a service-delivery option. It certainly is the appropriate choice when an external firm can do a job better than you can. But the hard work only begins at this point. Managing the seams between outsourced service and internal function is more art than science.

Look for the stock of the most artful CIOs to keep climbing.