Outsourcing on the Rise

Despite the fact organizations worldwide are deferring capital expenditures, outsourcing continues to be the number one tool chosen to drive organizational change, according to EquaTerra’s Advisor and BPO/ITO Service Provider Pulse Survey 3Q08. The findings show demand for outsourcing is outpacing business investments in areas such as hardware, software or other types of more discretionary project-based services.

Growth in outsourcing was positive, but mixed across market sectors with over 40% of those polled citing increased demand levels in the quarter. The survey also revealed that focus is shifting from longer term initiatives aimed at improving end-to-end business processes and moving toward efforts that deliver quick return on investment (ROI) and/or facilitate short term business objectives that bring immediate cost savings, help align operating costs to reduced revenue/profits levels and reduce short-term capital outlays.

Key findings:

– Demand for BPO and ITO rose in 3Q08 and was mixed according to service providers. Demand was stronger in Europe than in the North America (64% of EU advisors cited increased demand compared to 25% in the Americas) and slightly stronger for BPO (58%) over ITO (39%). Service providers polled were somewhat more pessimistic on demand levels, but, overall, are still seeing market growth.

– Forty-one percent of service providers characterized their 4Q pipelines as up; a drop of 11% from last quarter and below the survey average of 55%.

– The economy is both disrupting and driving deal flow. Overall, 38% (service providers 43%, advisors 33%) cited economic conditions as causing buyers to slow or defer outsourcing efforts, the highest level cited over the past three quarters. However, 42% of overall survey respondents indicate economic conditions are driving more outsourcing, despite slowness in certain market sectors.

– Increased pricing competitiveness: half of the service providers polled reported more aggressive pricing, up 15%, but contract profitability remains stable—61% of service providers report no change, while 26% report a year-over-year improvement. Increased pricing competitiveness is a manifestation of tight market demand, increased competition for deals and more demanding buyers.

Emerging Issues

Spurred on by globalization, technology and financial forces, outsourcing has gained ground as a strategic change initiative. With greater acceptance and implementation, buyers are beginning to grapple with how to manage and govern multi-provider/multiple outsourcing efforts. While many outsourcing contracts are still initiated at the functional or business unit level, both EquaTerra advisors and global service providers indicate buyers are beginning to establish multi-provider sourcing relationships at the corporate level in an effort to manage business case objectives better and measure ROI.

In recognition of potential overlap/integration issues, more buyers are taking the increased cost and complexity of employing multiple providers in overlapping functional areas into consideration when short-listing potential service providers. Longer term, this trend could lead to more supplier rationalization and consolidation to streamline and simplify sourcing and governance efforts. Bottom line, buyers should account for multi-provider/multiple outsourcing complexities upfront during the sourcing process for new outsourcing efforts.

“Over time, buyers will likely adopt a global, cross-functional or portfolio-based governance approach,” said Stan Lepeak, EquaTerra’s managing director of global research, in a written statement. “Developing and adopting standardized outsourcing governance operational models, investing more in skilled personnel and leveraging software tools to automate and improve governance operations will be central to achieving business case objectives for multi-provider outsourcing efforts.”

About EquaTerra’s 3Q08 Pulse

EquaTerra conducts ongoing research on a variety of topics relating to emerging markets, changing market conditions and demand for outsourcing. The company combines relevant recent research with trending data gathered through its quarterly survey of leading outsourcing service providers and its own client-facing advisors to create its Pulse report. For more detail or to obtain a copy of the Pulse survey, please contact [email protected].