Sourcing Market Pulse

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.

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

Outsourcing Market Demand - Holding Steady

EquaTerra recently released the findings from its 2Q09 advisor and service providers Pulse surveys. It showed demand for outsourcing remaining strong through growth levels were not as robust as those seen last quarter. Demand for global sourcing also remained strong as the desire to cut costs continues to outweigh other factors that detract from global sourcing (e.g., trade protectionism, increased availability of labor in western markets at a lower cost than seen in several years). There is also more interest in nearshore services, highlighting the overall growth of all models of outsourcing, as well as buyer desires to take advantage of good deals wherever they can find them.

As buyer appetites for global sourcing remain strong, their preference in locations from which to source services continues to diversify. More buyers are seeking to have global services delivered from locations beyond India. This is a function of buyer desires to diversify, the increased competitiveness of emerging markets like South America, and the expansion of Indian and global providers into more markets. Overall it represents an ongoing move toward a true global sourcing model where buyers deploy and manage global service chains just as they have global supply chains.

Follow this link below to access full results from the Pulse survey, a replay of the webcast presenting the results that I conducted with Bill Thomas, Executive Director of EquaTerra Europe and Asia, and several podcast excerpts from the webcast.

There has been much talk in the market about falling prices for outsourcing services.  The discussion has not so much be are prices falling but by how much.  Five percent?  10%+? 

So should all outsourcing buyers push for lower prices in new deals?  Open up in-flight deals to renegotiate?  Should service providers just suck it up and cave on buyer pricing demands?

There is certainly greater pricing pressure in the market today on outsourcing service providers than there was one year ago.  Seventy-five percent of service providers polled in the 1Q09 EquaTerra Pulse survey indicated pricing pressure increased, up from 45 percent in 1Q08.   There are anecdotal examples of buyers renegotiating lower prices for existing deals.  Infosys admitted to price driven renegotiations in a February 10^th article in the Wall Street Journal.

The premise behind prices declines is that outsourcing buyers, desperate to cut costs, are demanding lower prices and this coupled with weakening demand  will drive prices down market wide. The argument is based on flawed logic.    Accurately assessing the  impact of current market conditions on outsourcing pricing requires  1) distinguishing outsourcing from other types of third party services 2) understanding the role of outsourcing is enabling desired cost reductions 3) analyzing the operating models of outsourcing service providers  to determine their interest and ability to reduce prices.

The reality in the market is there is pricing pressure but that it is not leading to blanket or frequent significant cost reductions.  There are many factors playing against reductions, including service provider selectivity and their need to maintain margins, buyer aggressiveness to get deals done and get to the cost savings, and other structural factors like exchange rate trending that affects pricing.

I recently spoke with Dave Brown, Managing Director of EquaTerra's financial architecture practice.  Dave laid out the reality of market pricing and also provided good advice on why outsourcing buyers may not want to seek the lowest price deal or automatically seek to open up existing deals to push for lower pricing.  You can hear the full conversation of my discussion with Dave in this podcast.   We have also published a longer article on this topic. 

Let me know what you're seeing in the market on pricing and how it's affecting your own deals.

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