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Outsourcing market 2008
23/07/08
Organisations
are increasingly building and utilising complex services supply
chains to lower costs and address the emerging opportunities and
perceived threats of Globalisation, according to EquaTerra’s Advisor
and BPO/ITO Service Provider Pulse Survey 2Q08.*
The 2Q08 Pulse Survey, a survey of top outsourcing service providers
and EquaTerra’s own client-facing advisors provides data on current
and projected demand for outsourcing worldwide, plus a unique
insight into the impact ongoing Globalisation is expected to have on
outsourcing.
“Services supply chains have steadily become both more diverse and
more widely distributed, with large organisations forming hundreds
of different relationships with hundreds of different service
providers worldwide,” says Stan Lepeak, managing director of
research for EquaTerra. “Ongoing Globalisation is accelerating that
process and adding new layers of complexity.” The 2Q08 Pulse Survey
looks at some of the challenges relative to these expanding services
supply chains.
Most organisations don’t yet do a good job of arranging
relationships with services providers. EquaTerra finds buyers’
overall skills at developing quality outsourcing business cases are
mediocre, particularly when it comes to assessing total costs to
achieve desired improvements from outsourcing and attendant indirect
or shadow costs.
Respondents to the 2Q08 Pulse Survey believe the two most useful
metrics for building a solid outsourcing business case are current
performance levels (75 per cent) and current direct costs (74 per
cent), yet the survey finds many buyers don’t accurately capture
even these most important measurements. The ability to optimise and
manage global services supply chains on the backend is proving
equally challenging.
2Q08 Pulse Survey respondents rate buyers as poor to mediocre across
a variety of governance activities, including their ability to
measure service level agreements (SLAs) and end-user satisfaction.
While these problems are not new, they are exacerbated as
organisations do more global sourcing.
Creating complex services supply chains is intrinsic to
Globalisation and struggles to develop the tools and skills needed
to manage them is to be expected, according to Lepeak. “It took
decades for manufacturing supply chains to mature. Now,
organisations are steadily migrating from those vertical integration
models to horizontal specialisation.”
The 2Q08 Pulse Survey indicates there is accelerating interest in
outsourcing’s flexible cost and operating models as Western
organisations seek ways to weather the economic downturn and counter
lower-cost global competition. The 2Q08 Pulse Survey focus on
Globalisation draws on data collected in an earlier study conducted
by the Economist Intelligence Unit on behalf of EquaTerra and World
50, which polled more than 200 C-level and other senior executives
from 19 industry groups worldwide about the benefits and challenges
of Globalisation. In that study, more than 54 per cent of
respondents reported the number one response to Globalisation was a
greater emphasis on improving business process efficiency and
effectiveness.
Almost half, 47 per cent, said their firms were investing in new or
existing operations in foreign markets, including third-party
outsourcing relationships and the establishment of captive offshore
operations. Many, 35 per cent, said they were also investing in IT
applications to become more competitive and reduce costs. EquaTerra
increasingly sees Western organisations tapping the robust IT talent
pool found in emerging markets and turning to IT outsourcing as a
way to upgrade and expand IT capabilities without upfront capital
investment.Additionally, the survey findings show that:
• Demand for business process and IT outsourcing (BPO and ITO) is
expected to exceed 2006 and 2007 levels. Pulse Survey demand
projections and pipeline forecasts are indicative of deals that
typically close over the next two to three quarters. EquaTerra
advisors (38 per cent) indicated demand levels were up for 2Q08,
down 12 per cent from 1Q08 but up eight per cent over 2Q07.
• Service providers characterised their Q2 pipeline for BPO and ITO
deals as rising 10 per cent to 52 per cent, a 14 per cent increase
over last quarter. Projections for next quarter are only slightly
less optimistic, with 45 per cent of providers polled expecting
continued growth in demand, down from 50 per cent last quarter.
Outsourcing efforts with short-term return on investment or that
deliver quick cost savings are going forward, often at an
accelerated pace. Not surprisingly, efforts focused on complex
process transformation or that require significant upfront
investment are more likely to be slowed or on hold.
• Demand and supply increased for emerging knowledge process
outsourcing functions such as engineering, research and development,
financial modeling and analytics, legal process work. There was also
growth in areas like document services, facilities and real estate
management and logistics services.
EquaTerra estimates there were more than 150 outsourcing deals in
2Q08 with an average total contract value (TCV) of $270 million.
This compares to 120 deals in 1Q08 with an average TCV of $120
million. These numbers exclude deals not publicly announced or
announced without publishing deal details.
Nick Gibson, editor
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