Sourcing Market Pulse

As you may have noticed this blog has been quiet for awhile.  We have not stopped our commentary just moved it over the main EquaTerra blog to better consolidate and promote the collective EQ opinion on market trends and events.  Please follow me there and also connect with the EquaTerra Facebook and Twitter accounts.

Merry New Year - Stan Lepeak, Managing Director, EquaTerra and EquaSiis Global Research

If you're looking for some weekend listening materials, check out these podcasts I have recorded over the past several weeks with Lee Ann Moore, EquaTerra's CMO.  There's a topic for everyone.  Share with family and friends.

• Is America Outsourcing Its Innovation?
• The Context of Accenture's Earnings Announcement
• How the Economy is Driving Software Application Decisions
• Protecting Against Risk in Applications and Code
  

Stan Lepeak, Managing Director, EquaSiis Global Research

One of the functional outsourcing areas we reviewed in the most recent global EquaTerra Pulse survey was the application development and maintenance (ADM) space.  ADM demand, at least on the application development side of things, has been hit hard by the economic downturn of the past 18 months.  Buyers typically view new application development efforts as more discretionary (often rightly so) and are more likely to cancel or delay them when budgets are tight.  ADM efforts are often delivered via shorter term contracts or through the use of contract labor pools, making them easier to curtail than longer term and more formalized true outsourcing efforts.  The maintenance side of ADM holds up better because it is harder to cut back on supporting of existing applications than it is to pull back on the development of new ones.

There are others change afoot in the ADM market, however, that will impact the level and nature of buyers' longer term demand.  The preference for commercial software applications over custom code, a long running trend, continues to grow and is reinforced as commercial apps continue to become more configurable and app vendors target more specialized application areas that in the past were out of scope.  The growth and maturation of software as a service (SaaS), both as a software delivery and new economic model for point and enterprise applications, further erodes the traditional ADM model. 

These are all good things for buyers but create challenges as well as opportunities for traditional players in the ADM space, especially tier two and below Indian providers.  The ability to provide cheaper and often equally or better skilled software development resources proved a boon for the Indian IT services market.  From the buyers perspective, however, configurable semi-off-the-shelf software designed to support specific business processes, deployed rapidly, and priced in a rental model, is an evolutionary step up from any legacy custom software development effort.

There is no reason why legacy ADM providers cannot capitalize on SaaS opportunities.  Developing compelling SaaS apps, however, requires much more than good ADM skills.  It requires an understanding of key business process and vertical industry requirements of the applications being developed, the means to to support an annuity pricing model, and the ability to provide hosted support and related services above and beyond those offered in traditional application maintenance efforts. 

Custom ADM will never "go away" but making a good living providing ADM services will increasingly require a complementary and quality SaaS story and capabilities.  Read more on this topic at the EquaTerra blog.

Stan Lepeak

Managing Director, EquaTerra & EquaSiis Global Research

EquaSiis recently completed a new whitepaper looking at HRO (human resource outsourcing) renewal best practices.   The paper was sponsored by HRO service provider Convergys.  If any of you are at the HRO Summit in Tampa this week, I am there delivering a session on HRO renewals based on this research with Steve Ditty, VP or HR Management at Convergys.

The topic is a timely one given the number of early multi-process HRO deals that are now approaching renewals.  It is important given that one of the key success factors with HRO renewals is to start far enough in advance of the renewal date to give adequate time to work through the process.  So even buyers in the early stages of HRO efforts should have a plan and timing agenda for inevitable renewal efforts.

The paper provides an analysis of renewal options and guidelines (see figure below for one example) and frameworks to employ during renewals.  It identifies key success factors (start early, involve key buyer and service provider stakeholders, reevaluate the HRO business case and realign to the HR and corporate strategies, etc.) and important blind spots to avoid (rearview mirror strategy, renewal isolation, new contract/old premises, etc.)  These best practices are further illustrated through the review of three successful Convergys HRO renewals. 

The paper is useful for buyers both in the early stages of their HRO efforts and especially for those approaching renewals.  Many of the best practices apply to other functional areas of outsourcing. 

EquaTerra announced the results of the 3Q09 advisor and service provider Pulse surveys today.  Read the release here and get the full details in a webcast this coming Thursday, October 15th.

EquaTerra will release the results of its global 3Q09 Pulse survey via a webcast next Thursday, October 15^th at 11 ET.  I will host the webcast and Mark Robinson, EquaTerra's COO, and Bill Thomas, Executive Director of EquaTerra Europe and Asia, will join me. 

The webcast will cover the usual topics of current and forward looking market demand   for third party business and IT services (good to strong, see chart below), characteristics of that demand (price pressure easing, sales cycles improving, downward pressure on scope) and also address some special topics (changing buyer outsourcing strategies, deeper dive into procurement outsourcing and ITO). 

Register for the webcast and to receive a copy of the whitepaper detailing the full Pulse survey results when it is released or access past quarter's global, regional or industry Pulse results.

Check on the transcript of an interview between Lee Ann Moore, EquaTerra's CMO, and Mark Toon, EquaTerra's CEO, to get Toon's take on the impact of the recent M&A activity in the ITO market.

"The recent consolidation among IT services firms has raised many questions among our clients and the broader market about outsourcing service provider stability, what is on the horizon and factors outsourcing buyers need to consider. Their concerns revolve around gaining a general sense of, "What do these consolidations mean for me and my organization? Who are the viable players in this market? What options do we have as a large enterprise?"  To gain some perspective, I interviewed our CEO, Mark Toon, to better understand these issues."  -read more-

EquaTerra recently released the results of its 2Q09 Dutch ITO service provider Pulse survey.  EquaTerra conducts the Dutch ITO service provider Pulse on a quarterly basis in parallel with its global service provider and EquaTerra advisor Pulse surveys. 

Demand for ITO services grew in the quarter but overall was weaker than in 1Q09.  Some specific highlights from the Dutch ITO service provider Pulse include the following.

• Service providers polled indicated that next quarter ITO market demand growth is less strong than last quarter. In the 1Q09 Dutch Pulse, there were high expectations about the amount of organizations planning to outsource, but expectations tempered during this quarter - even though the pipeline and demand projections still look healthy.
• Although there are numerous contracts due for reletting the coming period and customers are expanding their outsourcing scope with the same service provider, new deals are slow to market, at least slower than expected.
• Many customers are currently reviewing their contracts, SLA levels, and performing pricing benchmarks and considering their possibilities. In this economic climate especially, more people are involved in the decision-making process and more attention is paid to assessing any potential opportunities and risks.
• The market demand for more discretionary third-party services, such as consulting, systems integration and implementation work, is increasing.  This is in contrast to findings from the global Pulse surveys.

For more information on the Dutch Pulse survey and Dutch market conditions, contact Paul Cornelisse or Mariska ten Broek.

Today Xerox, more known for copiers than outsourcing, announced the acquisition of BPO/ITO service provider ACS for a healthy $6.4B (down to $5.6B on Tuesday due to the fall in Xerox' stock price).   Like with Dell and Perot Systems the synergies "on paper" are strong though there will be issues merging two very different organizations and cultures (Dallas meets Rochester).  While Xerox has a large services business ($3.8B revenue last year) it has been mainly tied to lower-end services linked to its product business.  Its "document services" outsourcing business focuses on more value-added services tied to specific document/content-heavy business processes is strong but in a still nascent outsourcing market segment.  The near term opportunities for the merged firm will be in lower end business process outsourcing services but the strategic value will come from growing the higher end business.  Read more on the EquaTerra blog.

As most of you have probably heard by now Dell announced yesterday a rather expensive acquisition of Perot Systems.   Dell needs to expand its services offerings in the corporate world to compete better with the likes of HP/EDS and IBM.  Perot Systems has struggled to grow and keep up beyond what it has been able to do in the healthcare space.  So on paper it looks like a good move but the integration of services firms is always tough (remember PwC and IBM) and even if the merger succeeds, is it enough for Dell?  Check out further thoughts on the merger from myself and Lee Ann Moore, EquaTerra's CMO, on the EquaTerra blog.