Outsourcing Activity Reaches 10-Year High

MBA (7/23/2008 ) Palaparty, Vijay
During the first half of this year, the outsourcing industry experienced the highest level of activity in more than 10 years, according to the latest index from TPI, Houston, a sourcing data and advisory firm.
Europe, the Middle East and Africa markets saw a 58 percent increase in total contract value from the same period last year, outpacing the Americas and Asia Pacific markets.

Despite a slowdown in the more widely known markets, EquaTerra, Houston, reported a 38 percent increase in overall outsourcing demand for the second quarter in its Advisor and BPO/ITO Service Provider Pulse Survey 2Q08. Down 12 percent from the first quarter, overall outsourcing activity was reported up 8 percent over the second quarter of 2007.

“It appears that since the fourth quarter of 2007 and continuing today, corporate attitude towards cost reduction has had a new sense of urgency,” said Peter Allen, partner and managing director at TPI. “Companies across industry segments are expressing their concerns regarding uncertain business conditions by taking steps to reduce operational costs, and the outsourcing industry is benefiting. We see little to disrupt this outsourcing upswing as we head into the third quarter, and we may even be looking towards a record year in 2008 for outsourcing in terms of TCV.”

TPI said the shift from the Americas and Asia Pacific markets to the Europe/Middle East/Africa (EMEA) markets results from greater average contract size rather than an increase in the number of contracts; 10 out of 13 mega deals—contracts in which the TCV is $1 billion or greater—made in the first half of the year were awarded in EMEA.

“Finishing as one of the strongest first halves in more than a decade is attributed to the 282 contracts valued at nearly $49 billion in TCV, and nearly $10 billion in ACV [annualized contract value] that were awarded in the first half of 2008, yielding a brisk year-over-year increase of 24 percent by TCV and 36 percent in ACV,” Allen said.

EquaTerra reported that outsourcing service providers said their second quarter pipeline for BPO and ITO deals would rise 10 percent to 52 percent, a 14 percent increase over last quarter. Projections for next quarter were slightly less optimistic. Forty-five percent of providers expect continued growth in demand, down from 50 percent last quarter.

“Outsourcing efforts with short-term return on investment or that deliver quick cost savings are going forward, often at an accelerated pace,” said Stan Lepeak, managing director of research for EquaTerra. “Not surprisingly, efforts focused on complex process transformation or that require significant upfront investment are more likely to be slowed or on hold.”

EquaTerra also reported that supply and demand increased for knowledge process outsourcing functions such as engineering, research and development, financial modeling and analytics and legal process work. The market also experienced growth in areas like document services, facilities and real estate management and logistics services.

"Services supply chains have steadily become both more diverse and more widely distributed, with large organizations forming hundreds of different relationships with hundreds of different service providers worldwide," Lepeak said. "Ongoing globalization is accelerating that process and adding new layers of complexity."

He also said that organizations are also seeking ways to weather the economic downturn and counter lower-cost global competition, increasing interest in outsourcing’s flexible cost and operating models.