EquaTerra Whitepaper 3Q09 Pulse Report Oct2009 3123
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EquaTerra Advisor and Service Provider Pulse
Survey Results 3Q09
Introduction
EquaTerra is pleased to release the ndings from its 3Q09
EquaTerra advisor and business and information technology
(IT) service provider Pulse surveys. Through these surveys,
EquaTerra has developed a highly informative gauge that
provides quarterly insights into trends and projections in the
outsourcing and third-party business and IT service markets,
gleaned from its own eld advisors and leading global service
providers. EquaTerras advisors are the leading experts on
business and IT services, assisting buying organizations
actively exploring or undertaking shared services, outsourcing,
offshore and other service delivery alternatives.
Since their inception in 2004, the EquaTerra advisor and
service provider Pulse surveys have yielded insightful analysis
of current and ongoing market trends. They capture changesin demand, scope, capacity and related key market indicators.
They highlight the changes, and the direction of change, in
the business and IT service industry as a whole. The surveys
focus on where the market is going and how that direction is
changing or not compared to prior quarters and years.
EquaTerra also incorporates key quantitative market data and
leading indicators from sources outside the Pulse surveys.
These sources include experiences from direct client advisory
engagements and other EquaTerra market research, as well as
service provider performance and satisfaction studies.
This edition of the advisor and service provider Pulse surveys
reects business and IT service market activity during 3Q09
(July through September 2009) and projections for the
balance of 2009 and into 2010. Topics explored include:
Demand and buying patterns, including the impact of
market conditions on the demand for outsourcing and
related third-party business and IT services
Deeper dive analysis of buying patterns and trends in
procurement outsourcing and IT outsourcing (ITO)
The impact of current market conditions on buyer
sourcing investment strategies and common buyer
activities undertaken in response to market conditions
Outsourcing deal scope, sales cycles, pricing, contract
value and protability
Service provider pursuit and delivery capacity
The Pulse surveys focus on using outsourcing and other third-
party services to support the following functional areas:
Customer care/call center
Finance and accounting (F&A)
Human resources (HR)
Information technology
Knowledge process outsourcing
Procurement
Vertical industry business services
The following leading global business and IT service providers
were polled for this quarters sell-side survey:
Accenture
ACS
Caliber Point
Capgemini
Ceridian
Cognizant
Convergys
CSC
Genpact
HCL Technologies
Hewlett-Packard
IBM
Mercer
Northgate Arinso
Outsource Partners Intl
Steria
TCS
Wipro
WNS
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Business process outsourcing (BPO) and ITO market
demand growth remained steady in 3Q09 according
to EquaTerra advisors and third-party business and IT
service providers polled. Providers were more bullish on
growth than advisors, but both groups cited growing
market strength. Most of the pent-up buyer demand
accrued at the end of 2008 and start of 2009 has made
it into the market, but uncertain market conditions and
turmoil within individual buyer accounts continue to slow
some sourcing efforts.
Buyer sourcing strategies still primarily are focused on
cost cutting and avoidance of future investments. Ifanything, they are becoming more defensive as opposed
to shifting usage to third-party services as a means to
prepare for an economic upturn. While defensiveness
is understandable in current market conditions, buyers
must start to shift sourcing strategies in a direction that
supports a more growth oriented business environment.
The market for more discretionary third-party services,
such as consulting, systems integration and some
application development work, remains weaker than for
outsourcing, though there are signs of improvement indemand for application development services. Public
sector and military/aerospace markets remain a strong
exception where demand for all types of third-party
business, mission support and IT services remains strong.
There are a variety of activities buyers are more
aggressively undertaking in light of current economic
conditions, including opening deals back up to negotiate
better pricing and service levels, as well as doing more
benchmarking and baselining of new deals. Overall,
though, the pursuit of these and related activities varies
across accounts and situations and is far f rom universal
in uptake.
Buyers are assessing newer, or newly packaged, delivery
models like software as a service (SaaS) and remote
infrastructure management (RIM) on their potential
to complement, extend, or in some cases supplanttraditional outsourcing efforts. SaaS will have greater
impact on the market, more so as a substitute for
buying software than on outsourcing. RIM, while having
interesting attributes, will prove primarily an extension to
existing IT infrastructure outsourcing models.
Service provider capacity overall remains tight for
both deal pursuit and delivery, but conditions did not
change signicantly in the quarter. Service provider
selectiveness is helping to improve capacity. Budget and
skill constraints and the need to chase and deliver moresmaller deals, exacerbates capacity constraints, as do ts
and starts in buyer sourcing efforts.
Growth in pricing pressure on serv ice providers
continued to ease compared to earlier in the year.
Pricing pressure levels overall remain high as buyers seek
lower cost deals occasionally at the expense of quality.
EquaTerra offers the following conclusions from the 3Q09 Pulse survey:
Distribution of the EquaTerra Pulse survey reports, controlled by EquaTerra, is intended for internal use and select delivery to
EquaTerra clients, prospects and other marketplace representatives. Questions or comments regarding these surveys should be
directed to Stan Lepeak, Managing Director of EquaTerra and EquaSiis Global Research, +1 203 458 0677 or
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Table of Contents
IntroductionI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
EquaTerra Advisor HighlightsII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4BPO/ITO Service Provider HighlightsIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Market Demand and Market Trends UpdateIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Advisors: Market DemandFigure 1 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Advisors: Demand by Service Delivery ModelFigure 2 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Advisors: Change in Demand by Service Delivery ModelFigure 3 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Service Providers: New Deal Pipeline ProjectionsFigure 4 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Service Providers: Demand Next QuarterFigure 5 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Weighted Aggregate Market Demand: Advisors & Service ProvidersFigure 6 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Economys Impact on Outsourcing DemandV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Economic Environments Impact on OutsourcingFigure 7 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Market Conditions: Impact on Buyers Sourcing Investment Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Changes to Buyers Sourcing Investment StrategiesFigure 8 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Demand Trends by Functional AreaVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Advisors: Demand by Functional AreaFigure 9 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
Service Providers: Demand by Functional AreaFigure 10 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Advisors: Functional and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Service Providers: Functional and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Demand Trends by Functional Area: Deeper DiveVII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Procurement Outsourcing: Key Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Key Procurement Outsourcing Success FactorsFigure 11 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
ITO Trending: Application Development and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17ITO Trends: ADMFigure 12 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
ITO Trending: Software as a Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18ITO Trends: SaaSFigure 13 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
ITO Trending: Remote Infrastructure Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19ITO Trends: RIMFigure 14 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Demand Trends by IndustryVIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20Advisors: Demand by IndustryFigure 15 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Service Providers: Demand by IndustryFigure 16 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Sales CycleIX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Service Providers: Sales CycleFigure 17 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Pricing CompetitivenessX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23Service Providers: PricingFigure 18 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Deal ScopeXI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24Service Providers: ScopeFigure 19 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Service Providers: Contract Proftability and Ability to Increase ScopeXII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Service Providers: Contract ProtabilityFigure 20 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Service Providers: Ability on Increase ScopeFigure 21 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Service Provider CapacityXIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Advisors: Service Provider Capacity, OverallFigure 22 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Advisors: Service Provider Capacity, PursuitFigure 23 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Advisors: Service Provider Capacity, DeliveryFigure 24 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Service Provider CapacityFigure 25 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Common Buyer Responses to Current Market ConditionsXIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Common Buyer Responses to Current Market Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Common Buyer Responses to Current Market ConditionsFigure 26 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Service Provider Market UpdateXV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Deal Snapshot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Select Top Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Service Providers: Current Deal Portfolio StatusXVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34Service Provider Re-competes and RenegotiationsFigure 27 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Service Provider Cancellations and Non-renewalsFigure 28 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Service Provider Problem ContractsFigure 29 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
ConclusionXVII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Appendix - Key Questions by Advisors Primary Geography and Outsourcing Focus AreaXVIII. . . . . . . . . . . . . . . . . . . . . . . . . . .37
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Market Demand and Market Trends Update
Change in demand growth for BPO and ITO, as well as other business processes and
IT services, held steady in the third quarter of 2009 according to EquaTerra advisors
polled (see Figure 1)*.
Forty-eight percent of advisors indicated that overall third-party business and
IT service demand levels were up in the quarter, two percent from 2Q09 and
ve percent from 3Q08 levels. This level is below the average 53 percent up
rating over the life of the survey.
Just ve percent of advisors indicated demand levels had declined in the
quarter, in line with the survey average, down two percent from last quarter.
Demand levels were similar across geographies and functional areas, with
advisors that support BPO deals somewhat more positive on overall demandgrowth than those that support ITO efforts. Please see the appendix for a
complete breakdown of response levels by geography and type of service work
supported.
1Advisors: Market Demand
0%
10%
20%
30%40%
50%
60%
70%
80%
90%
100%
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Down Flat Up Aggregate
Figure 1
EquaTerra advisors were polled on demand levels across the different categories of
business and IT services. These categories are BPO, ITO, other types of third-party
IT services (e.g., consulting, systems integration, project-based work) and internalprocess improvement efforts (i.e., deploying expanded shared service of offshore
captive operations). Figure 2 shows the areas of greatest demand. Figure 3 illustrates
the relative change in demand for these service delivery models compared to the
prior quarter.
1 *The aggregate market demand and pipeline levels illustrated in Figures 1-3 are based on a
calculation of the down, at and up responses to each question, and depict a combined or
aggregate total of each quarters response levels.
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ITO was the strongest area of demand across the four service delivery
categories cited by 65 percent of advisors (Figure 2), down two percent from
last quarter, followed by BPO at 18 percent, unchanged from last quarter.
Sixty-one percent of advisors indicated that demand for ITO grew quarter over
quarter (Figure 3). Fifty-n ine percent of advisors indicated that demand for
internal transformation efforts like shared services grew in the quarter.
Twenty-seven percent of advisors cited an increase in demand for non-ITO
third-party IT ser vices, an increase of eight percent from last quarter. This
appears an early indicator that demand for these more discretionary services is
reviving after several weak quarters.
Advisors: Demand by Service Delivery Model
3%
3%
14%
18%
65%
Other
Other IT Svcs
Internal Imp.
BPO
ITO
Figure 2
Advisors: Change in Demand by Service Delivery Model
%%
%
5 %
%
%
% % % %
BPO ITO Other IT Svcs Internal Imp.
Down
Flat
Up
Figure 3
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The ongoing strong demand for internal transformation efforts highlights that
organizations today more often are addressing problems themselves in addition
to bringing in external resources. Typically, this approach is more common inorganizations less prone to outsourcing, such as those in the public sector. This
trend will increase in the public sector given a combination of great need for change
and less viability of using outsourcing as a change and improvement tool. Buyers
also undertake internal process work to prepare processes for outsourcing prior to
transitioning them to providers (e.g., improve/transform and then outsource).
The acute need to reduce costs and overhaul operating models will continue driving
more outsourcing deal ow into the market. Demand for other t ypes of third-party
services, like unbundled consulting and more discretionary application development
work, will remain weak throughout 2009. Protectionist trade policies, anti-
outsourcing rhetoric and anti-globalization efforts will continue to grow in western
markets but will have limited impact on overall outsourcing levels, though some
measures will complicate some buyers sourcing agendas.
Service providers polled continued to become more enthusiastic regarding new deal
pipeline growth projections (see Figure 4).
Seventy-ve percent of service providers polled cited pipeline growth in the
quarter, up 10 percent quarter over quarter and 34 percent year over year.
These are the highest levels recorded since the second quarter of 2005.
No service providers cited a decline in pipeline growth.
Service Providers: New Deal Pipeline Projections
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Down Q/Q About the same Up Q/Q Aggregate
Figure 4
While all service providers polled were positive relative to pipeline growth, larger
multinational service providers were the most enthusiastic.
Service providers remained optimistic about future outsourcing demand growth (see
Figure 5).
Sixty-eight percent of service providers polled expect an increase in demand
next quarter, up ve percent from last quarter and 29 percent from 3Q08.
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No service providers expected demand levels to decline next quarter.
Please note this question is a measure of change in demand growth quarter over
quarter not absolute demand levels.
Service Providers: Demand Next Quarter
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Decrease Flat Increase Aggregate
Figure 5
The nal chart in this section (see Figure 6) highlights general demand trending
over the past 19 quarters. The weighted average is based on response levels from
both advisors and service providers for each quarter. Any aggregate totals above
the line indicate overall market growth, while totals below the line indicate market
contraction. The gap between service providers and advisors grew for the third
straight quarter. This is in part a function of advisors providing more of a forward
indicator than providers as well as growth in current account expansion by providers
and in non-advisor deals
Weighted Aggregate Market Demand: Advisors & Service Providers
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
Advisors Service Providers
t o t
t nt ct
Figure 6
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Economys Impact on Outsourcing Demand
The global economic recession seems to have bottomed out in late 2Q09 and
was recently ofcially announced as over in the United States. Great variations in
economic stabilities still exist, however, across geographies, industries and individual
organizations. There is also much debate about whether the recovery will show a
V or L shape (i.e., rebound strongly or result in slow growth for the foreseeable
future). Regardless, economic conditions continue to heavily impact buyer usage and
preferences for third-party services and the manner in which they consume these
services.
EquaTerra has polled advisors and service providers over the past seven quarters as
to how current economic conditions are impacting outsourcing demand levels (see
Figure 7).
The combined response levels for advisors and service providers show that 53
percent felt market conditions are driving more outsourcing. This level was
down ve percent from last quarter. Advisors and service providers were in
sync on this response.
Forty-three percent overall indicated economic conditions are causing buyers
to slow or rethink outsourcing decisions, up four percent from last quarter.
Buyers more often are deferring, not canceling, outsourcing initiatives.
The deferrals typically are caused by other events occurring in the buyer
organizations that have impacted the sourcing process, rather than by buyers
changing their minds about outsourcing.
There were no major variations in responses from advisors based on geography
or functional area of outsourcing supported.
Economic Environment s Impact on Outsourcing
% 5 % % % %
%
%
%
5 % %% 4 %
%% %
% % 4%
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
Driving more outsourcing Slowing/rethinking outsourcing plans Little/no impact
Figure 7
Advisors offered the following additional comments on how the current economy is
impacting outsourcing and third-party service usage.
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Buyers have always required the need to reduce costs. Outsourcing is a
tool to enable them to get there. It might have some more visibility with
some rms that were against it and see no other options but not to theextent that the downturn has driven a huge amount of inuence, just more
awareness of the opportunity.
Emphasis is cost reduction as organizations are becoming truly critical in
assessing what is or is not value add in the business. Speed to benet is
more important now as well, so objectives/strategies are less ambitious.
Clients taking a phased approach.
The volume is increasing but buyers are rushing the process taking
shortcuts which will most likely lead to lower realized savings and deals that
may require renegotiation in the future.
There is a feeling the downturn is over and now is time for taking action.
Service providers added these comments on how the economy is impacting market
demand.
As the economy struggles, cost leadership and risk management are
becoming more of an issue in the global scenario, pushing the clients
from end-to-end outsourcing to tactical single process outsourcing. The
necessary requirement is the presence of a strong business case.
The economic downturn is making outsourcing more palatable to a
broader set of clients. Clients are focused on optimizing their operations
and containing costs, and see BPO as a potential lever. Offshoring, inparticular, is resonating with clients who seek short-term cost reductions
with limited upfront investment. However, clients are also delaying decision-
making resulting in longer, more drawn out sales engagements and
contract negotiations.
Market Conditions: Impact on Buyers Sourcing Investment Strategies
EquaTerra continues to see buyers use troubled times as a motivator to pursue
aggressive change efforts they were too timid or distracted to undertake when
times were good. They have a strong desire to make the deep cuts and major
changes to service delivery models required to fundamentally change operating
models to better compete with more aggressive global competition.
EquaTerra added a new question for both service providers and its advisors in this
quarters Pulse survey to ascertain if buyers strategic approaches to outsourcing are
shifting back toward supporting growth or are still largely focused on reducing costs
or deferring investments (see Figure 8).
Just 10 percent of EquaTerra advisors polled indicated that buyers sourcing
plans, investments and strategies have begun to focus more on supporting
growth in anticipation of an economic upturn.
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Two-thirds of advisors indicated that buyer sourcing strategies have not
materially changed over the past several quarters and are still driven by
defensive moves to reduce costs and avoid new investments. Twenty-threepercent of advisors felt that buyers have become even more defensive over the
past few quarters.
Advisors in the Americas were least likely to feel that buyers sourcing strategies
reected preparation for better economic times. Advisors that primarily
support BPO effor ts were more likely to take this view than those supporting
ITO.
Service provider response levels were nearly identical to overall EquaTerra
advisor responses
Changes to Buyers Sourcing Investment Strategies
0%% Preparing for an economic upturn
No material change; defensive/cost
cutting focused
Even more defensive
Figure 8
Despite improvements in stock market and general overall market conditions, few
buyers are aggressively preparing for an economic upturn even though for some it
has already begun. While a narrow focus on costs and the bottom line is expected
and advisable during recessionary times, buyers that wait too long to refocus on
growth risk falling behind their competitive peers as the economy picks back up.
Demand Trends by Functional Area
EquaTerra advisors see demand trends by functional area (e.g., F&A, HR and IT)
continuing in the same direction in 3Q09 as the past few quarters (see Figure 9).ITO was the strongest functional demand area, followed by FAO. HRO demand levels
continued to remain weak as customer care outsourcing slipped past HRO to take
the number three spot in the poll. HRO was identied as the top area of demand
by just 12 percent of advisors, the same percentage that identied procurement
outsourcing. As one EquaTerra advisor who supports HRO noted, In an economic
downturn HRO will contribute only modestly to improvement of the company
baseline. If a trade-off is made between spending consulting dollars on HRO or other
initiatives (e.g., source-to-pay outsourcing), then HRO will not prevail.
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Advisors: Demand by Functional Area
0% 20% 40% 60% 80% 100%
Procurement
HRO
CC/CRM
FAO
ITO
3Q09
3Q08
3Q07
Figure 9
ITO was also the top area of demand cited by service providers in 3Q09 (see Figure
10) followed by FAO and HRO. It is important to note that demand levels registered in
the Pulse surveys are impacted by the particular outsourcing service providers polled
in any one quarter
Service Providers: Demand by Functional Area
0% 10% 20% 30% 40% 50%
CC/CRM
Other
HRO
FAO
ITO
3Q09
3Q08
3Q07
Figure 10
EquaTerra continues to see growth in demand for outsourcing beyond the back
ofce in non-traditional functional and process areas like research and development,
real estate services, facilities management, analytics and other areas of knowledge
process outsourcing. Demand in these areas has been impacted by current market
conditions that in some cases have lessened the need for these services, but in
others have made outsourcing more appealing as buyers seek to reduce costs and
overhaul service delivery models. New areas of outsourcing focus are also often
industry specic, for example, remote metering and smart grid initiatives in the
utilities industry; clinical trials, analytics and R&D in life sciences; and document
service outsourcing in paper intensive industries like healthcare and the public sector.
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The growing importance of document services was highlighted recently with the
announced acquisition by Xerox of BPO/ITO service provider ACS by Xerox, which has
a large document service outsourcing practice and is looking to expand into moremainstream areas of BPO and ITO.
The charts on the following two pages illustrate outsourcing demand by process
area for the four major functional areas IT, HR, F&A and procurement covered
in the Pulse surveys. There are no major changes in demand levels across these
functions and processes compared to recent quarters. EquaTerra introduced a new
classication scheme for procurement, or source to pay, outsourcing this quarter.
It provides a more granular analysis of procurement outsourcing usage and is
complemented by a new question assessing the spend categories most frequently
outsourced in these efforts.
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Advisors:
Functional and Process Area Demand
Advisors: HRO Demand
0% 20% 40% 60% 80% 100%
Compensation
Workforce Effectiveness
Learning/Training
Recruiting/Talent Mgmnt
Benefits
HR IT
Payroll
3Q09
3Q08
3Q07
Advisors: FAO Demand
0% 20% 40% 60% 80% 100%
Finance, Control, Risk Mgmnt
Travel & Entertainment
General Accounting
AR/C&C
Accounts Payable
3Q09
3Q08
3Q07
Advisors: ITO Demand
0% 20% 40% 60% 80% 100%
Packaged Apps Svcs
Networks/Telco
Desktop Services
ADM
Infrastructure/Ops
3Q09
3Q08
3Q07
Advisors: Procurement Outsourcing Demand by Process
4%
7%
9%
9%
11%
13%
20%
24%
39%
46%
52%
Logistics/freight mgmnt
Supplier base research
Savings tracking
End-to-end category mgmnt
Supplier performance mgmnt
Procurement help desk
Spend analytics
Tactical/spot buying
Accounts payable
Procurement operations
Strategic sourcing
Advisors: Procurement Outsourcing Demand by Spend
Category
4%4%4%4%
8%8%
10%12%
14%16%16%
18%25%
29%33%
71%
FleetMeeting services
R&DUtilities
Marketing/market rsrch/adsTransportation & logistics
Direct goods & servicesMRO
TravelOffice supplies & fixtures
Temp/contingent laborFinance and InsuranceEmployee/HR services
Facilities mgmnt/real estateConsulting/legal/professional
IT
Service Providers:
Functional and Process Area Demand
Service Providers: HRO Demand
0% 20% 40% 60% 80% 100%
Workforce Eff.
Compensation
Learning/Training
Recruit/Tal. Mgmnt
HR IT
Benefits
Payroll
3Q09
3Q08
3Q07
Service Providers: FAO Demand
0% 20% 40% 60% 80% 100%
Decision Support
Fin, Control, Risk Mgmnt
Travel & Entertainment
General Accoutning
AR/C&C
Accounts Payable
3Q09
3Q08
3Q07
Service Providers: ITO Demand
0% 20% 40% 60% 80% 100%
Networks/Telco
Packaged Apps Svcs
Desktop Services
Infrastructure/Ops
ADM
3Q09
3Q08
3Q07
Service Providers: Procurement Outsourcing Demand
by Process
11%
11%
33%
44%
44%
67%
67%
End-to-end category mgmnt
Inventory mgmnt
Supplier base research
Spend analytics
Strategic sourcing
Procurement operations
Accounts payable
Service Providers: Procurement Outsourcing Demand
by Spend Category
8%
8%
8%
17%
17%
33%
33%
42%
42%
50%
Consulting/legal/professional
Direct goods & services
Facilities mgmnt/real estate
MRO
Finance and Insurance
Office supplies & fixtures
Temp/contingent labor
Travel
Employee/HR services
IT
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Demand Trends by Functional Area: Deeper Dive
This quarters Pulse survey took a deeper dive into trending in both procurement and
information technology outsourcing.
Procurement Outsourcing: Key Success Factors
In addition to reformatting the question on process demand levels for procurement
outsourcing and adding a new question on outsourced spend categories,
EquaTerra polled both service providers and its advisors on the key success factors
in procurement outsourcing efforts (see gure 11). EquaTerra is also in the process
of conducting a more in-depth market study of both buyers and providers on
procurement outsourcing trends. Final results from this study will be available later
in the fourth quarter of this year. Preliminary results are in line with the ndings
presented below.
There was consensus between advisors and serv ice providers as to the most
critical procurement outsourcing success factors. Fifty-four percent of service
providers and 50 percent of advisors cited transparent and agreed upon
savings measurement and tracking process as the most important factor.
End-to-end process scope (e.g., full source-to-pay cycle vs. single process
management) was the next leading factor cited by 41 percent of advisors and
38 percent of service providers. Deep service provider category expertise was
ranked the second most important factor by providers.
Strong change management/compliance management was highly ranked by
both advisors and service providers.
EquaTerra has found that tough economic times have increased buyer interest in
procurement outsourcing. Procurement outsourcing goals are centered on both
reducing procurement organization operating costs, as well as redirecting the
procurement group to focus on more strategic activities. Enabling the latter is
the key to driving growth in the procurement outsourcing market. Procurement
outsourcing also can directly and indirectly support buyer organization efforts to
reduce overall spend and drive supplier consolidation and rationalization efforts.
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Key Procurement Outsourcing Success Factors
0% 20% 40% 60%
Gain sharing tied to achieving / exceeding savings targets
Category scale
SP risk tied to underachieving savings targets
Client comfort with SP protection of confidential info
Enabling technology to support S2P process
Strong client category sponsorship
Deep provider category expertise
Strong change/compliance management
End-to-end process scope
Transparent/agreed savings measurement/tracking process
Service Providers
Advisors
Figure 11
ITO Trending: Application Development and Maintenance
In the 3Q09 Pulse survey EquaTerra assessed market trending in three dimensions of
ITO: ADM, SaaS and RIM.
ADM has been one of the hardest hit outsourcing market segments over the
past 24 months. The development side of ADM often is viewed by buyers as
more discretionary. Given many of these efforts are contracted as shorter term
engagements or via contract labor, they are easier to slow down or stop than more
comprehensive outsourcing efforts when budgets get tight. Many buyers during
growth years signed up with ADM providers that often were smaller and India-based,creating a fragmented supplier base ripe for consolidation. Custom application
development work is impacted by the growth of SaaS as an alternative model to gain
access to new software. Buyers are exhibiting a growing desire and acceptance for
more standardized, packaged software offerings delivered as part of an outsourcing
effort in lieu of developing new custom applications from the ground up.
EquaTerra polled service providers and its advisors on six dimensions of the current
ADM market. Respondents were asked to rank their level of agreement with each
statement on a one-to-ve scale where one represented strongly disagreed and ve
strongly agreed (see gure 12).
Both advisors and service providers agreed the strongest trend in the currentADM market is that buyer interest in custom ADM work has declined in
favor of using off the shelf commercial software (e.g., customer relationship
management, enterprise resource planning (ERP)). This is not necessarily a
new trend but one that has been accelerated by current market conditions.
Additionally, with service providers scoring this question at 3.5 and advisors
3.26 on the one-to-ve scale, the level of agreement with the statement is
more moderate than strong.
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There were mixed opinions between advisors and service providers as to
whether multinational or India-based service providers are beneting more
from buyer ADM supplier consolidation and rationalization efforts. The morelikely losers in any market shake-out are tier two and three providers rather
than tier one Indian or multinational service providers.
Both advisors and service providers were more likely to disagree, albeit
modestly, that buyer demand for outsourced ADM remains weak. Many buyers
view it as a discretionary spend viably delayed or believe buyer interest in
custom ADM work has declined in favor of using SaaS offerings.
A key trend highlighted in the ADM market is that buyers are rationalizing supplier
bases and consolidating work with fewer suppliers. This will lead to fewer, but larger
and longer term ADM contracts. Coupled with the longer term growth of the SaaS
market, this means continued tough times for smaller ADM players and ongoing
consolidation and attrition in the supplier market
ITO Trends: ADM
1 2 3 4 5
Custom ADM demand has declined in favor of SaaS
offerings
ADM demand weak as many buyers view it as a
discretionary spend viably delayed
Buyers are actively consolidating the ADM s upplier base
to no one class of service providers benefit
Buyers are actively consolidating the ADM s upplier base
to the benefits of multinational service providers
Buyers are actively consolidating the ADM s upplier base
to the benefits of India-basedservice providers
Buyer interest in custom ADM work has declined in favor
of using off the shelf commercial software
1= Strongly disagree, 5=Strongly agree
Service Providers
Advisors
Figure 12
ITO Trending: Software as a Service
SaaS is similar to outsourcing in that it enables a buyer to access new software
capabilities without having to build and then host and manage the software
applications themselves. More often in todays market SaaS is an alternative to
purchasing and installing traditional commercial software applications within a buyer
organization. In both cases market uptake often is being driven by business unit
owners. They are looking for more turnkey solutions that circumvent and alleviate
pains and challenges associated with implementing internally hosted and managed
commercial software or undertaking traditional software application outsourcing.
These issues include having to extensively involve the IT group in the selection
and decision-making process, as well as addressing the complexities and potential
limitations of introducing new software into the corporate operating environment.
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The focus of the question in the 3Q09 Pulse was to what degree buyers view SaaS
as complementary or an alternative to traditional outsourcing. Figure 13 illustrates
that there is agreement between service providers and EquaTerra advisors that mostbuyers have not yet formed a solid or consensus opinion on SaaS offerings relative to
traditional outsourcing efforts.
Adopting SaaS offerings can reduce implementation costs and challenges and lower
ongoing support costs. Depending on the application, however, integration back
into buyers internal systems can add to upfront and ongoing complexities and costs.
While SaaS applications may offer some of the same functionality buyers seek from
BPO, SaaS vendors do not offer the same level of support, application management
and ownership BPO can deliver. Given where the market is today, the onus and
opportunity rests with both outsourcers and SaaS vendors to drive buyer opinion in a
favorable direction relative to their offerings.
ITO Trends: SaaS
0% 50% 100%
SaaS viewed as alternative to traditional
outsourcing
SaaS viewed as complementary to traditional
outsourcing
Most buyers have not yet formed a solid
opinion on SaaS relative to traditional
outsourcing
Service Providers
Advisors
Figure 13
ITO Trending: Remote Infrastructure Management
The third area of the ITO market assessed in this quarters Pulse survey was RIM. RIM,
like cloud computing, is a term and concept with mixed meanings in the market.
Some question whether RIM really is a new and improved service delivery model or
just a new marketing concept. Most IT infrastructure outsourcing, for example, has
involved services being delivered and managed off-site. Legacy infrastructure serviceproviders like CSC, HP and IBM have all long had global networks of service delivery
centers. Does it really matter if off-site is now farther away or offshore?
RIM is as much about a new class of India-based service providers entering the
infrastructure outsourcing market as it is a new delivery model or paradigm. Buyer
uncertainty over RIM is reected in the Pulse surveys ndings. Advisor and service
providers polled were asked to rank their level of agreement with three statements
about RIM on a one-to-ve scale where one represented strongly disagreed and ve
strongly agreed (see gure 14).
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EquaTerra advisors showed the greatest agreement, though just over the mid-
point at 3.50, that many buyers have not formulated a strong opinion on RIM
and it is s till largely a provider-driven concept. Not surprisingly, this was thestatement service providers agreed with least, scoring it at a 2.75.
Providers scored highest at 3.83 the statement that many buyers view RIM
as a means to meaningfully improve the quality and/or reduce the costs of IT
infrastructure services, while advisors scored this one at 3.44.
Advisors and service providers agreed that many buyers have not formulated a
strong opinion on RIM and it is still largely a provider-driven concept.
RIM represents an incremental evolution in how providers deliver outsourced
IT infrastructure services. It will further drive commoditization in the market by
increasing the focus on cost. As the top tier of the infrastructure outsourcing serviceprovider market continues to consolidate and Indian players with a more diverse set
of complementary offerings make further inroads, infrastructure outsourcing will
increasingly become one component in larger outsourcing efforts.
ITO Trends: RIM
1 2 3 4 5
RIM viewed the same way as traditional
infrastructure ITO
RIM viewed as means to meaningfully improve
the quality and/or reduce IT infrastructure
costs
Most buyers have not yet formed a strong
opinion on RIM
1= Strongly disagree, 5=Strongly agree
Service Providers
Advisors
Figure 14
Demand Trends by Industry
The two charts below illustrate industry demand as cited by EquaTerra advisors and
service providers. Industry rankings generally have been consistent over the past few
quarters.
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Advisors: Demand by Industry
0% 10% 20% 30% 40% 50%
CPG, Food/Bev, Retail,Wholesale
Govt (Fed, State, Local), Edu
Pharma/Biotech
Energy/Utilities, Oil & Gas
Banking, Fin Svcs, Insurance
3Q09
3Q08
3Q07
Figure 15
Service Providers: Demand by Industry
0% 20% 40% 60% 80%
Telco
High Tech Products/Svcs
Manufacturing
CPG, Food/Bev, Retail,
Wholesale
Banking, Fin Svcs, Insurance
3Q09
3Q08
3Q07
Figure 16
Outsourcing demand remains solid in the banking and nancial services industries.
This is not surprising given the challenges buyers in these sectors are facing and their
need to reduce costs, but shows buyers are still pushing sourcing efforts forward
despite other operational challenges. Public sector demand remains strong, though
it is comprised of a proportionally higher percentage of non-outsourcing third-party
services. Ironically, there is evidence that newly infused stimulus money is beingspent on third-party services. Public sector organizations are showing increased
interest in moving from legacy customer software application environments to
commercial ERP systems as a means to reduce operating costs and to improve and
standardize service delivery models. Finally, energy and utility buyers are focused
on reducing operational costs through internal shared service operations and
outsourcing.
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Sales Cycle
For the purposes of the Pulse surveys, the sales cycle is dened as the time period
from RFP release to contract signing. Many factors contribute to the length of the
sales cycle, including:
What is being outsourced
Level of buyer sophistication and experience
Complexity, size and regional/global reach of the potential outsourcing deal
Degree of multi-sourcing present in the deal por tfolio
Preferred service provider sales pursuit capacity and selectivity
Whether a sourcing advisor is being used
Disruption to the sourcing process due to turmoil in the buyer organization,
economic uncertainty, or changing macro-business all heightened issues in
the current market
The Pulse surveys do not measure the absolute length of sales cycles. EquaTerra
estimates, however, the sales cycle for larger deals (those with more than $50 million
in total contract value, or TCV) that are competitively bid typically is six to 12 months
barring deal ow disruption from the time the buyer goes to the market until the
deal is closed. The time frame typically has been compressed 15-25% over the past
year given market conditions.
Current market trends are contributing to both shortening and lengthening sales
cycles. Smaller deals pursued by more experienced buyers can lead to shorter sales
cycles. On the other hand, the complexities associated with multi-sourcing can
complicate the sourcing process and extend the sales cycle, as can considering more
intricate pricing arrangements. EquaTerra sees most buyers today more intensely
scrutinizing pricing models and levels. Global deals also are more complex to source.
The major factor impacting sales cycles over the past year, however, has been
sourcing cycle disruption caused by economic events. While deal ow is improving in
the market, EquaTerra expects to see economic conditions and uncertainty continue
to complicate the sourcing process into the rst half of 2010.
Figure 17 illustrates sales cycle trends according to service providers polled in thisquarters study. Sales cycle trending improved modestly for the second consecutive
quarter.
Twenty-six percent of service providers indicated sales cycles were lengthening.
This level is above the survey average but just one percent higher than last
quarter.
Twenty-one percent of service providers indicated sales cycles were shortening,
the highest level recorded in more than three years.
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Service Providers: Sales Cycle
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Lengthening Same Shortening
Figure 17
Pricing Competitiveness
Increased pricing competitiveness implies the buyer has the upper hand and is
getting a better priced outsourcing deal. As pricing is one element of determining
protability, the alternative of less competitive pricing is generally favorable to the
service provider. The consensus from the middle of 2008 through earlier this year
among service providers, especially India-based rms, has been that buyers are
getting more aggressive with their pricing demands. This trend began to reverse
itself last quarter. At the peak in 1Q09, 75 percent of service providers indicated
pricing pressure was increasing. This level has receded over the past two quarters.
Figure 18 illustrates pricing trends according to service providers in this quarters
study.
Just thirty-two percent of service providers polled indicated that pricing
pressure increased in the quarter. This is back below the survey average of 41
percent and the lowest level recorded since the end of 2007. Indian service
providers continued to cite increased pricing aggressiveness more frequently
than multinationals.
The balance of service providers polled indicated pricing pressure remained
unchanged. This highlights that while pricing pressure still is not increasing as
much, it is not necessarily declining.
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Service Providers: Pricing
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More Aggressive Same Less Aggressive
Figure 18
While there is a stronger desire among buyers today to get more aggressive
with pricing, a number of factors ultimately can temper nal pricing levels. More
experienced buyers generally are aware that the lowest price may not lead to the
best deal. There is concern now in the market among buyers about entering into
deals today that will fail because of bad pricing. Buyers also can reduce overall spend
the ultimate goal by lowering consumption levels, but still pay an equitable unit
price for services that helps ensure they get the providers top resources.
Service providers inuence pricing competitiveness by the extent of their own
aggressiveness in pursuing deals. More service providers in the market today are
increasingly selective about the clients and deals they pursue. Service providers are
more closely assessing the risk proles of clients they are pursuing and adjusting
their pricing accordingly. Buyers in nancially difcult situations or industries are
treated with higher risk premiums and contract terms that can increase deal pricing.
Buyers in good standing or seen as highly strategic will receive attractive pricing
even with similar risk proles and even though the provider is not offering blanket
market reductions. Providers continue to look for ways to reduce operating costs
and overhead to meet their current contract commitments, while pushing price
competitive policies regardless of the economic downturn. The net result is more
aggressive pricing in the market, but not routinely egregious pricing terms, at least
for top tier service providers or less desirable buyers.
Deal Scope
Deal scope is dened as the number of processes, users, geographies, etc. included
in an outsourcing arrangement. Contract value usually is directly correlated to scope,
though the mix of remote/low-cost delivery resources involved also affects contract
value. From the outsourcing buyers perspective, understanding trends in scope and
contract value helps not only to determine how aggressively other organizations are
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pursuing outsourcing, but also how to dene and construct a viable and potentially
optimal-sized deal. The growth of the multi-sourcing/multi-provider outsourcer has
both driven and resulted from smaller deal scope. On average, scope levels havebeen at to declining for the past two years.
Figure 19 illustrates deal scope trends according to service providers polled in this
quarters study.
Just 16 percent of service providers polled indicated that scope was increasing,
down 10 percent from last quarter and the lowest level recorded in the life of
the service provider Pulse surveys.
Twenty-one percent of service providers indicated that scope level had
decreased, down ve percent from last quarter when the highest level
recorded in the life of the surveys was registered.
Service Providers: Scope
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Decreased Same Increased
Figure 19
The ongoing decreases in scope levels highlight greater buyer interest in smaller,
more manageable and quickly executed deals. Buyers also are closely scrutinizing all
deal components and paring back anything deemed peripheral or discretionary.
Service Providers: Contract Proftability and Ability to
Increase Scope
A variety of factors impact service provider protability, including deal scope,
transition costs and time frames, and buyer pricing sophistication. Exchange
rates affect serv ice provider protability, particularly rms with extensive global
operations. Wage ination in offshore markets had been an issue for the past
several years, but has largely dissipated, at least for the time being. Service providers
with a higher mix of remote/low-cost resources had been putting pressure on the
protability of competitive peers with fewer lower-cost resources for the past several
years. This pressure has eased over recent quarters as more providers globalize,
exchange rate trends shift and market growth slows.
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The biggest factor impacting contract protability today is buyer pressure on
pricing and aggressive competitiveness between providers. Over the past year all
providers have faced pressure on existing contract protability. This has resultedfrom buyer pricing pressure, more competition for business, buyer pull-back on more
protable discretionary services, and an increased focus on cost cutting over process
improvement work.
Figure 20 illustrates contract protability trends according to service providers polled
in this quarters study. The Pulse survey addresses protability on existing contracts,
not new deals in the pipeline.
Fifty percent of service providers polled indicated contract protability was
improving, the same level recorded last quarter. Multinational service providers
were more likely to cite improving protability than were India-based service
providers.
The balance of serv ice providers cited no change in protability levels, and no
providers indicated declining protability in existing contracts.
Service Providers: Contract Proftability
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Declining Profitability Same Amount Improving Profitability
Figure 20
Figure 21 illustrates service provider expectations about their ability to increase
scope in current accounts. All providers today are very focused on growing business
in existing accounts because pursuit costs are lower than competing for new
business and they must protect their base as buyers rationalize suppliers and cut
back on spend levels.
Sixty-one percent of service providers expected to increase scope in current
accounts. This is a three percent decline from levels recorded last quarter and
the second straight quarterly decline.
Just six percent indicated scope would decline in existing accounts.
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Service Providers: Ability on Increase Scope
0%
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Decline Remain Contstant Increase
Figure 21
Service Provider Capacity
Service provider capacity is an important factor that inuences other trends, such
as pricing competitiveness, sales cycles and protability. EquaTerra denes service
provider capacity as the availability of adequate and skilled resources for sales
pursuit, engagement and transition/delivery. The challenge service providers face is
the scarce supply of quality experience, which takes time and multiple outsourcing
deals to develop.
Capacity also is tightly linked to service provider aggressiveness in deal pursuit. When
service providers are being more selective and entering into fewer deals, as is often
the case in todays BPO market, they need less capacity for pursuit and delivery.
Capacity is intentionally constrained to keep costs down and to match capacity to
demand goals. As both buyers and service providers focus more on smaller deals
with fewer processes in scope, capacity pressure is lessened within individual deals
but exacerbated as more deals are in ight. Disruptions in deal ow over the past
year have contributed to service provider pursuit capacity constraints.
Figures 22 through 24 illustrate combined capacity levels for pursuit and delivery,
and then separately break out the two.
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Advisors: Service Provider Capacity, Overall
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Figure 22
Advisors: Service Provider Capacity, Pursuit
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Figure 23
Advisors: Service Provider Capacity, Delivery
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Figure 24
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Overall capacity levels remained largely unchanged in the quarter after seeing
gradual improvements over the past year. Twenty-six percent of advisors cited
constrained or tightening serv ice provider capacity, down 12 percent from lastquarter (see Figure 22) and the rst quarter over quarter decline since 2Q08.
Nineteen percent of advisors overall cited improved capacity, down slightly
compared to last quarter and 3Q08.
Capacity for sales pursuit and deal structuring (see Figure 23) improved in
the quarter. Twenty-six percent of advisors cited constrained levels, down 12
percent from 2Q09 and the rst quar ter over quarter decline since 2Q08.
Sales pursuit capacity is dually impacted by more supplier selectivity (improves
capacity) and more market demand (strains capacity, especially as service
providers manage down pursuit costs). Budget pressures and reduced funding
by providers for deal pursuit also hurt capacity.
Capacity levels for deal transition and delivery remained steady for the quarter
(see Figure 24). Constrained or tightening citation levels came in at 27 percent,
down 11 percent from last quarter and four percent form 3Q08. Just 15
percent of advisors, however, indicated transition capacity was adequate or
improving, down quarter over quarter and year over year.
Both sales and delivery capacity vary across functional areas of outsourcing and
across different supplier classes. Sales pursuit capacity is more constrained in EMEA
(cited by 31 percent of advisors) than in the Americas (18 percent of advisors). While
constrained capacity levels cited were higher among EMEA advisors, the levels
declined from last quarter. Advisors who primarily support BPO efforts were morelikely (24 percent) to cite improved levels in transition capacity than those advisors
who support ITO (10 percent).
EquaTerra advisors offered the following comments on the reasons for positive and
negative changes in service provider capacity.
Pursuit capacity
Many service providers are stretched and we see many working multiple
deals resulting in less attention to the client and solution than in previous
years.
Providers have matured and they are now including their delivery teams in
the sales pursuit which certainly keeps them much more honest about what
they promise.
While capacity is unchanged, providers are more cognizant of the cost of
pursuit.
Delivery capacity
Limited resources (A players) are scarce as they are required to stay on
existing clients longer and longer, thus not available for transition or initial
delivery.
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Good transition managers would appear to be even scarcer than good
sales managers.
The providers have been constrained for some time. They have been
focused on increasing their experienced resources which may not be
adequate yet given the increased number of deals.
Providers are dealing with buyers who are slow, cautious and prone to
elongated approval processes.
Outsourcing service providers typically have been more optimistic about their own
capacity. Figure 25 illustrates contract pursuit and delivery capacity trends according
to service providers polled in this quarters study.
Forty-two percent of service providers indicated capacity was adequate or
increasing, up two percent from last quarter and up slightly year over year.
India-based service providers were somewhat more likely to indicate capacity
was improving.
Just ve percent of providers indicated that capacity was constrained or
tightening, down signicantly from levels recorded in earlier quarters.
Providers concurred that more client and deal selectivity is helping to improve sales
pursuit capacity levels. The ongoing expansion of global delivery footprints similarly
is helping improve transition and delivery capacity as is continual improvement to
remote delivery capabilities. On the issue of the quality of sales or pursuit capacity,
advisors and service providers continue to have differences of opinion
Service Provider Capacity
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Constrained/Tightening Unchanged Adequate/Increasing
Figure 25
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Common Buyer Responses to Current Market Conditions
Common Buyer Responses to Current Market Conditions
Last quarter the Pulse survey assessed the challenges buyers have with the transition
process in outsourcing deals. Successful transition efforts are key to getting
outsourcing efforts off on the right foot and to providing a solid base from which
to launch ongoing outsourcing governance efforts. Unfortunately the consensus
among service providers and EquaTerra advisors was that more often than not buyers
struggle with outsourcing transition.
This quarter the Pulse surveyed assessed the most common activities that buyers
have become more aggressive about undertaking, given current market conditions,
in outsourcing deals already in ight. Advisors and service providers were asked to
identify how frequently they are seeing eight different activities in the market and
rank them on a one-to-ve scale, where one represents very uncommon/infrequently
undertaken and ve represents very common/frequently undertaken (see gure 26).
The most common activity, according to EquaTerra advisors, which scored
3.83 on the one-to-ve scale, was reopening contracts to renegotiate pricing
levels. Service providers scored this activity at the mid-point on the scale. The
most common activity cited by service providers perform more thorough
benchmarking/base lining when preparing for new outsourcing efforts
scored 3.56.
Also scored above the mid-point by both advisors and service providers was
pushing for more outsourced work to be performed in low cost/offshore
locations and overhauling outsourcing governance operating models, for
example, by consolidating efforts. Last quar ters Pulse survey took a deeper
dive into global sourcing trends.
There were no major variations between different classes of EquaTerra advisors.
The greatest difference was with enforcing benchmark clauses in existing deals,
which was scored 2.84 by advisors in the Americas and 3.57 by EMEA advisors.
Similar to the questions above, no activity scored above 4.0 or below 2.5 on the ve-
point scale, highlighting these activities are occurring but are far from universal in
uptake. Buyers are advised to regularly review their options relative to undertaking
any of these efforts.
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Common Buyer Responses to Current Market Conditions
1 2 3 4 5
Pushing for more work in nearshore or onshore locations
Overhauling outsourcing governance efforts
Enforcing benchmark clauses in existing deals
Reopening contracts to renegotiate service levels
Reopening contracts to renegotiate scope
Pushing for more work in low cost/"offshore" locations
Benchmarking/baselining when preparing for new efforts
Reopening contracts to renegotiate pricing levels
1= Uncommon/infrequent, 5=Very common/freq
Service Providers
Advisors
Figure 26
Service Provider Market Update
On an ongoing basis, EquaTerra conducts a comprehensive market study of ITO
service provider performance and satisfaction (expanding to FAO providers 2H09).
The ITO studies cover all major European markets, and the FAO program being
launched is global in nature. EquaSiis, an EquaTerra company, now manages the
Service Provider Performance Studies. This market study program surveys and
interviews buyers actively engaged in outsourcing efforts with a named set of
leading market-specic providers. The research unveils direct insights into buyer
opinions on service provider performance levels, also assessing and interpretinggeneral outsourcing demand and activity trends in the markets covered. Market
coverage and due dates for the next editions of these studies are as follows:
U.K. (next release 4Q09)
Netherlands (next release 1H10)
BeLux (next release 2Q10)
Nordics (next release 2Q10)
Germany (rst release 4Q09)
Pan-European ITO (released 2Q09, updated yearly)
Pan-European and North American FAO (rst release 4Q09)
Global HRO (planned 2010)
Global ITO (planned 2010)
Click here for additional details on this research offering and to get copies of
executive summary reports for all of the completed research efforts. EquaTerra also
conducts ITO service provider Pulse surveys in the Netherlands and U.K. markets in
parallel with the global advisor and service provider Pulse surveys. It also conducts
period vertical industry Pulse surveys. Click here for additional details on all Pulse
research programs.
http://www.equaterra.com/fw/main/Pulse-Survey-Results-1030.htmlhttp://www.equaterra.com/fw/main/Pulse-Survey-Results-1030.html -
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Deal Snapshot
The number of outsourcing deals closed in the quarter was low by historical
standards and in line with numbers from last quarter. EquaTerra estimates
approximately 95 outsourcing deals (in ITO and the functional BPO areas covered
in the Pulse surveys) with greater than $50 million in TCV were announced in 3Q09.
Average TCV for these deals was approximately $190 million. This compares to
approximately 90 deals with an average TCV of $225 million in 2Q09. Excluding a
large network outsourcing deal at Sprint with Ericsson, the average TCV was just
in the $150 million range. Only a handful of these deals were purely BPO. When
estimating the number of new deals and average TCV, it is important to recognize
that some deals are not publicly announced or deal details are not provided. The
ultimate TCV of a deal also is likely to change over the life of the contract. There were
approximately 175 total BPO and ITO deals with TCV levels greater than $25 million in
the quarter, up from 135 in 2Q09, reecting the average smaller size of deals making
it into the market.
Following is a select list of some of the top deals announced in 3Q09.
Select Top Deals
IBM win estimated at $250M over ve years with Carrefour (French retail rm).
IBM will provide data center and infrastructure services, including security
related services.
Tech Mahindra win estimated at $400M with Etisalat DB Telecom (joint venture
between UAEs Etisalat and Indias Dynamix Balwas). Tech Mahindra will provide
customer billing solutions and related IT infrastructure services.
IBM win estimated at $700M over ve years with BP. IBM will manage and
run BPs enterprise applications and integrated serv ice desk responsibilities,
especially supporting SAP applications. BP also awarded major contracts in the
quarter for application development and support and related IT services to
Accenture, Infosys, TCS and Wipro.
HP win estimated at $400M over ve years with Vale (Brazilian mining
rm). HP will provide IT infrastructure services globally, including midrange,
mainframe, storage and disaster recovery services, as well as run Vales global
communications network and provide managed print services.
CSC win estimated at $490M over up to ve years with the US Transportation
Security Administration (TSA). CSC will support TSAs IT Infrastructure Program
(ITIP) that delivers IT security, applications and related IT and business serv ices
to TSA operations centers.
IBM win estimated at $200M+ over seven years with Qantas. IBM will provide a
variety of project delivery services and tools. IBM inked a major ITO deal with
Qantas in 2004.
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Service Providers: Current Deal Portfolio Status
In the nal section of the Pulse survey, EquaTerra asked service providers to prole
the state of their deal portfolio from several dimensions:
Recompetes/Renegotiations
Cancellations/Non-renewals
Problem Contracts
These results are provided for informational purposes only and to highlight ongoing
market directional trending. They do not represent actual deal totals in any of
the categories proled. The number of service providers citing increased levels of
recompetes and renegotiations fell for the third straight quarter to 21 percent.
Cancellation and problem account levels remained largely unchanged.
Service Provider Re-competes and Renegotiations
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More Recompetes Same Amount Less Recompetes
Figure 27
Service Provider Cancellations and Non-renewals
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