Sourcing Market Pulse

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-

Given current global market and economic conditions it is clear that the pace of globalization has slowed and in some areas stalled or stopped.  Global trade in goods, for example, has fallen significantly and Lloyd's Marine Insurance estimates that 10 percent of the world's merchant ships are currently sitting idle.     The Baltic Dry Index, a common measure of global trade in goods that is based on international shipping prices of various dry bulk cargoes, fell over 90 percent in the second half of 2008 to the lowest levels recorded since 1986.

It is important, however, to separate the global trade in goods and materials from the global trade in services.  The story with services, specifically third party business and IT services, is much different.  Yes, there has been some slowdown in global or "offshore" outsourcing and some of the high-flying Indian service providers' growth levels have dropped from 40%+ to single digits and in some cases into negative levels. 

Overall, however, global sourcing continues to grow, driven by both buyer desires to gain access to talent and capabilities as much as to reduce costs and future investment requirements.  Protectionist trade policies and strings attached to various bail-out money have negatively impacted global sourcing but not materially, at least outside of industries and market segments like the public sector where global sourcing has never been a major priority.

This trend is highlighted in the results from the EquaTerra 2Q09 Pulse survey.  EquaTerra polled service providers and its advisors  as to what degree buyer preferences and interest levels have changed - or not - over the past 12 months relative to global service delivery in new outsourcing deals.   Respondents ranked perceived changes on a one-to-five scale, where one represented significant decrease in preference and/or demand, three represented no change, and five represented a significant increase in preference and/or demand.

The results illustrate that in general  demand did not decline for any type of outsourcing and that global sourcing demand remains strong and is for the most part growing. In parallel, demand for nearshore outsourcing also is increasing.   Nearshore work in some cases represents work that in the past may have been outsourced further offshore, but more often is work that either was recently outsourced or had previously been handled onshore.  The growth of nearshore is driven by a greater levels of more qualified supply as more service providers build out nearshore capabilities as well as changing buyer needs and preferences (e.g., different language support, closer geographic proximity, different risk and regulatory requirements). 

This trend also highlights the ongoing shift from point to point outsourcing (e.g., US to India, Western Europe to Central/Eastern Europe) towards a more truly global sourcing model.  Just as many large organizations have long operated and participated in global supply chains they are now building and expanding global service chains to support and deliver both their front and back office service.  Buyers today seek different services delivered from different providers and locations based on different and ever changing business needs. 

The 2Q09 Pulse survey also polled respondents as to the "hottest" locations for global sourcing.  India and Central/Eastern Europe remained the top two locations cited, but the number of respondents citing these locations fell over 20 percent from the end of 2007.  Locations like the Philippines and Central and South America scored much stronger than in 2007 illustrating the growth of these markets as both additional or alternative service delivery locations.  

So for buyers and providers of global business and IT services the questions remains not so much when or why but how - for buyers how define the optimal global sourcing strategy and execute on it and for service providers how to define a delivery footprint and model that meets evolving and more complex buyer needs.  In some respects the build out or acquisition of global service delivery capabilities has been the easy part.  Successfully exploiting and managing global service chains in the context of changing business conditions and needs, constantly evolving and often conflicting and confusing regulatory requirements, and while navigating nationalistic and protectionist political and trade policies will prove the greater challenge.

Stan Lepeak

Managing Director, EquaTerra and EquaSiis Global Research

EquaTerra this week released the 2009 edition of its Nordics ITO Service Provider Performance and Satisfaction (SPPS) study.  Click here to view the management summary and here for the (local language) press release.  This marks the third year that EquaTerra has run this research programs in the Nordics region.

Overall the results show a healthy and growing ITO market.  This first figure below shows the degree that outsourcing buyers feel that their outsourcing efforts have achieved the drivers originally sought.    Responses are segmented by ITO process area covered: Application Management/AM, Infrastructure Management/IM, and End-User Management/EUM.    Overall 64 percent of respondents are moderately or significantly positive relative to their outsourcing efforts achieving the original goals sought.  Danes are the most positive (77 percent moderate or significant) and Norwegians the least (58 percent).  The overall results are similar to what EquaTerra has found in other European market segments.      

The clearest indicator of the health of outsourcing is whether buyers plan to do more of it.  The second figure illustrates Nordic buyers' future outsourcing plans.  Forty-two percent plan to outsource more going forward while 25 percent plan to outsource less.  Expected growth plans are lower, however than they have been the past two years.    There were no consistent reasons for the slight slowing in expected growth levels.  Overall service provider satisfaction levels, for example, remained high with 73   percent of respondents indicating they are satisfied of very satisfied with the performance of their providers. 

The only individual key performance indication where satisfaction levels declined in 2009 compared to 2008 is service provider pricing.  This coupled with an increased emphasis on cost reduction as the major driver for outsourcing efforts is one potential factor impacting growth levels.  What is clear is that Nordics buyers are looking to strike hard bargains on price and cost reduction goals with service providers this year.

Stan Lepeak

Managing Director, EquaTerra and EquaSiis Global Research

Yesterday (April 28^th) EquaTerra released the results from its 1Q09 advisor and service provider Pulse surveys.  This marks the start of the fifth year that EquaTerra has been producing the Pulse surveys.  I delivered the results via a webcast that also featured Mark Toon, EquaTerra's CEO and Phil Morris, COO or Europe and Asia.

In contrast to what some others are seeing in the outsourcing market, leading business and IT service providers and EquaTerra advisors polled in the Pulse surveys were rather bullish on market demand.  Deal flow that had been slowed and disrupted by market events in 4Q08 has begun to flow back into the market.  Signs point to a busy market for the balance of the year and into 2009 with some questions already emerging about provider capacity relative to fielding skilled resources needed to adequately serve demand going into 2010.

The clear reason for this uptick in demand and resumption of market growth is the dire economic and market situations facing most western business and governmental organizations.   Economic conditions are not going to improve dramatically in the short or medium term.  Service delivery models for back office operations are too often both bloated and inefficient, a condition that was tolerable when times were good but untenable under current market conditions.  So radical times are driving radical remedies to reduce costs and overhaul delivery models for back office services.  And we are just seeing the beginning of these efforts. 

Here are some additional findings from the Pulse surveys.  Follow the link above to access the complete whitepaper of results, webcast replay and additional podcasts discussing results.

• While BPO and ITO market demand growth improved in 1Q09 the market for more discretionary third-party services, such as consulting, systems integration and some application development work remains weaker. The exception to this is in the public sector and military/aerospace markets where demand for all types of third-party business, mission support and IT services remains strong.  US public sector demand for third party services continues to grow in part driven by stimulus fund inflows.
• Market conditions overall are driving more demand for outsourcing but the nature of the demand continues to change.  Buyers are increasing pricing pressure on service providers and are also demanding more upfront and clearly define costs savings, smaller deals sizes and a strong focus on cost savings and cost avoidance.  Pricing pressure varies based on the quality and desirability of both the buyer and the service provider. 
• Market conditions are causing some buyers to push to open up existing deals to get better pricing and other terms and conditions.  Buyers for the most part are not pulling back from existing outsourcing efforts, global sourcing,  or the use of offshore based service providers.
• Global sourcing efforts will face more scrutiny in 2009 given market events (e.g., terrorist attacks in India, Satyam implosion, U.S. elections) but will continue to grow. Buyers will increase focus and improve abilities to address and account for risk in global sourcing efforts.
• Buyers in 2009 will migrate and consolidate third-party services work to larger and more established providers in a flight to quality but also to gain economies of scale and preferred pricing, terms and conditions.
• Market conditions are negatively impacting buyer abilities to perform outsourcing governance tasks as resources are cut and attention is focused elsewhere in the organization. 

Stan Lepeak

Managing Director, EquaTerra and EquaSiis Global Research

New Blog Link - Mark Kobayashi-Hillary

Check out the new link under "Related Blogs" to "Talking Outsourcing"  by Mark Kobayashi-Hillary.  Mark's been covering the global outsourcing market for years and also penned the very readable and relevant book on global sourcing called "Who Moved My Job?".  When not traveling the globe Mark's works out of London and has a day job writing for Computing.  Well worth your time to check out his work.

Stan Lepeak

Managing Director, EquaTerra and EquaSiis Global Research

Welcome to the Market Pulse, a new EquaSiis blog covering the global business and information technology (IT) services and sourcing markets. Through this blog, EquaSiis and EquaTerra executives, advisors and consultants will bring you timely and insightful commentary and analysis on the latest trends in global sourcing.

We will speak to both the buyers and users of third party business and IT services as well as the providers framing, designing and delivering services into the marketplace. This content will complement and extend other more traditional EquaTerra and EquaSiis research deliverables and provide a vehicle through which we can most efficiently cover and comment on the fast moving global services marketplace.

We will also aggregate for you the best and brightest market thought leadership from noted sourcing movers and shakers. To this end we are pleased to recommend and offer links to Phil Fersht's Horses for Sources and EquaTerra's own COO Mark Robinson's Provocation and Cogitations. EquaSiis will regularly serve up articles, interviews, pod and webcasts featuring leading buyers and sellers in the global services market.

As EquaSiis ramps up this new offering we also ask for your feedback and ideas. So don't be shy with suggestions on what we can bring you and how we can help with your sourcing efforts.

Thanks in advance,

Stan Lepeak

Managing Director, EquaTerra and EquaSiis Global Research

stan.lepeak@equasiis.com