Outsourcing remains a buyer’s market, but the state of the money markets means service suppliers are going to be extremely limited in their ability to structure innovative deals compared to previous years.
That’s one view of a global review by a group of sourcing lawyers, who make the case that service providers are less able in 2009 to carry deals on their balance sheets that only become profitable in the later stages of the service contract.
Morrison & Foerster’s Global Sourcing Group, specialist lawyers who advise companies buying and selling outsourcing services, have mapped a changing market for outsourcing services.
Based on what the lawyers have seen in their outsourcing projects during 2008, they expect that “outsourcing to survive” deals are likely to become the norm in 2009, despite the fact that outsourcing driven by cost-saving issues tend only to be short-term solutions.
In its report Global Sourcing Trends in 2009, MoFo says that because the downturn has followed hard on the heels of the credit crunch, service providers are finding it harder to structure their arrangements and include financing packages within their proposals.
Some of the “buy now, pay later” deals can no longer be externally financed.
In previous recessions, the outsourcing market revealed counter-cyclical tendencies because many companies have used outsourcing as a way to cut short-term costs, it notes in its report.
Attitudes towards data security as a parameter of outsourcing are also changing.
The issue will centre stage in any deals being cut during 2009, the lawyers expect. “We are already seeing outsourcing customers devote significantly more energy to incorporating new risk and liability provisions in contracts with their suppliers in respect of data loss and the consequences of breaching data security obligations.”
Banks and other financial services organisations will start to insist that their outsourcing service providers comply with ISO 22307:2008, a new standard to safeguard the privacy of people’s financial data processed by information systems.
Others will build specific provisions in outsourcing contracts requiring the encryption of service providers’ employee laptops and personal data sent on e-mail, or set data masking provisions and limitations on remote access to data centres.
Another view of Morrison & Foerster is that a period of consolidation in the market will lead to less leverage for customers in future negotiations.
The recent scandal in the Indian service provider market may also prompt a “flight to quality” by outsourcing customers. Companies such as IBM and Accenture with a wide portfolio of clients with whom they are able to maintain a relationship, will be best positioned to survive the recession, it said.
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