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April 30, 2009

Outsourcing demand strong in Q1 on robust pipeline

EquaTerra rates outsourcing cost gains greater than change effort

By CBR Staff Writer

Outsourcing advisory firm EquaTerra has recorded a surge in interest in outsourced services during the first quarter of the year, with the number of new service deals in the pipeline showing a 26% increase over the previous quarter.

The view is the economic crisis has prioritised outsourcing as a means of achieving short-term cost reductions and drive significant and sometimes overdue overhauls to back-office service delivery models 

“These deals are beginning to flow as the need to control costs outweighs reluctance to initiate major change efforts like outsourcing in the midst of an economic crisis and regulatory uncertainty,” Stan Lepeak MD of global research for EquaTerra said. 

Some 62% of service providers, including the largest US firms and Indian offshore providers, expect demand to stay strong in the second quarter, up 9% quarter-over-quarter and 14% year-over year.

In its 1Q09 Pulse Survey, EquaTerra reports that buyers more often are deferring, not cancelling, outsourcing initiatives. 

Buyers are not only getting more aggressive with their pricing demands, but expect higher quality services from their providers. EquaTerra said that during the rest of the year it expects buyers will start to migrate and consolidate third-party service work to larger and more established providers in ‘a flight to quality’. 

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In order to preserve margins, service providers are becoming increasingly selective about the deals they pursue. “Service providers are more closely assessing the risk profiles of clients they are pursuing and adjusting their pricing accordingly.”

The firm said that global sourcing efforts will face more scrutiny in 2009, given the market situation. Despite events like the terrorist attacks in India, the downfall of Satyam and rising unemployment levels, global sourcing will continue to grow. 

EquaTerra reckons there were up to 100 sizeable outsourcing deals announced in the first quarter of the year, each worth an average of $260 million. 

While the deals were smaller in scope, they grew in numbers as organisations decided cost-saving initiatives could no longer be postponed, it said.

 

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