The business case for outsourcing is building as the global economy slides deeper into recession, says a report by EquaTerra.
However, the ability to execute multi-year outsourcing deals is hampered by tight capital and market uncertainties, according to international business advisory firm EquaTerra. Industry consolidation, reshuffled priorities and continued budget/staffing cuts are fueling pent-up demand that will likely result in an increase of judiciously planned outsourcing engagements in the second half of 2009.
The business case for outsourcing is building as the global economy slides deeper into recession, says a report by EquaTerra.
However, the ability to execute multi-year outsourcing deals is hampered by tight capital and market uncertainties, according to international business advisory firm EquaTerra. Industry consolidation, reshuffled priorities and continued budget/staffing cuts are fueling pent-up demand that will likely result in an increase of judiciously planned outsourcing engagements in the second half of 2009.
EquaTerra’s Advisor and BPO/ITO Service Provider 4Q08 Pulse Survey finds that as organizations worldwide urgently seek ways to cut costs and free up cash flow, experienced outsource users are beginning to migrate/consolidate contracts to gain economies of scale and preferred pricing, terms and conditions, while new buyers are entering the market via speed sourcing–streamlined efforts focused on a few key initiatives to rapidly realize outsourcing benefits.
In light of recent terrorist attacks [in India] and financial scandal, wary buyers of business process and information technology outsource services may shift more work to larger, more established Indian firms and away from second-tier players, says EquaTerra. First-time buyers may want the added assurance of offshoring in India with top-tier western-based firms with extensive Indian operations. Despite concerns, however, EquaTerra expects India to remain the top-ranked offshore destination for the near term, according to Stan Lepeak, the firm’s managing director of global research. “We anticipate heightened scrutiny and greater safeguards being built into new and existing contracts, but India will retain its lead in the near future due to its many advantages, including language, talent and experience.”
The 4Q2008 EquaTerra Pulse found demand for outsourcing dips 5% quarter-over-quarter. Worldwide, 38% of EquaTerra’s advisors reported demand was up for business process and information technology outsourcing (BPO/ITO) and other business process/IT services in 4Q08, a decrease of 5% from last quarter. Advisors supporting work in the Americas, where the severity of the economic crisis was felt earlier and organizations are further into the downturn, were more likely to cite increased demand for outsourcing than those working in Europe.
Projections for 1Q09 demand are up–53% of the service providers polled expect an increase in demand next quarter, up 14% from the 3Q08.
Public sector is a bright spot–Demand in government and the public sector remains strong for IT outsourcing, back-office process improvements and support for deploying shared services. But service providers are also winning contracts for training, operational support and supply chain management.
A buyer’s market is developing. The deteriorating economy has a positive side for organizations seeking to expand their scale/scope of work. Outsourcing service providers feeling the impact of the downturn are focused on increasing market share by expanding existing accounts, providing savvy buyers the opportunity to use the downturn to make great strides toward transforming their business, accomplishing more, faster and with fewer resources.
EquaTerra finds third-party activities supporting the deployment, modernization, rationalization and operation of enterprise resource planning (ERP) applications and systems shows signs of strength in both the commercial and public sector. A confluence of factors is kindling a second wave of ERP deployments ranging from a desire for greater operational efficiencies and increased business process automation to heightened concerns over the security of custom software developed by third parties. Financials are also a key driver. EquaTerra finds organizations are increasingly outsourcing ERP applications/systems to amortize upfront capital expenditures for needed upgrades and improvements or to adopt a fee-for-service model, effectively shedding the expenses associated with ongoing operations/maintenance.
“Outsourcing service providers have both a skills and cost advantage,” said Lepeak. “They have a deep bench of experienced ERP experts that can get the most user value from ERP software and are on call to fix problems and initiate incremental upgrades. Too often ERP systems have proved to be financial sink holes, but, with the help of experienced service providers, they can be tailored to cut operations costs and support new business strategies.”
