Stan Lepeak, Managing Director of Global Research

EquaTerra released the results of its 1Q10 EquaTerra advisor and service provider global Pulse Survey via a webcast on April 20th.  This quarter’s Pulse covered the usual topics of third-party business and IT services market demand trends, and market and deal characteristics, and took a deeper dive into buyer issues and challenges with sourcing governance and change management. We will explore these latter two topics in future blogs.

While outsourcing demand growth remained relatively robust according to both service providers and EquaTerra advisors polled in the Pulse survey, study results identified a reemergence of greater deal flow disruption in the market. Specifically, the percentage of advisors and service providers who indicated current economic conditions are driving more outsourcing declined quarter over quarter (see the figure below) to the lowest levels recorded in more than a year. The number of advisors indicating that economic conditions are causing buyers to slow or rethink outsourcing efforts jumped over ten percentage points.

While most buyers still believe outsourcing can enable process improvement and reduce costs in the long run, they are today highly sensitive to short-run expenditures and, in some cases, are delaying or deferring outsourcing efforts that require any sort of upfront investments or major levels of resources to implement. In the short-term, the market is experiencing  a “double dip” in terms of deal flow as some of the factors that slowed outsourcing efforts in the second half of 2008 and early 2009 (lack of investment dollars, uncertainty over long-term organizational strategies, hesitancy to commit to any cost outlays, etc.) have again become more prevalent.

Bob Cecil, EquaTerra Executive Director of Business and Financial Processes, characterized current market conditions in this way. “We passed the first wave of shock from the economic crises which caused everybody to freeze in their tracks and not launch any new initiatives including outsourcing. We have moved into the second wave in which companies understand that cost and balance sheet competitiveness are critical to survival and, hence, are continuing to fuel interest in exploring outsourcing. However, the interest doesn’t always translate into completed transactions or even deals going to market. There is still a lot of hesitancy and uncertainty in the buyer community. We are seeing  companies looking not only at outsourcing, but a broader range of overhead and other cost optimization options across the full company portfolio. It is taking buyers time to sort all of this out. In short, interest is high, but actual translated demand seems smaller because of smaller deals, more time in decision making, more stops and starts.”

So as Bob points out, buyers are more closely looking at alternatives  that can complement, extend and in some cases supplant traditional outsourcing. These include internal process improvement instead or in advance of outsourcing, the deployment,  expansion or optimization of shared services centers, and investments in software as a service (SaaS).

Overall, if buyers remain more cautious, thorough and, in some cases, more conservative in their outsourcing efforts, this will, in many cases, be a good thing. The problems buyers have experienced with outsourcing efforts have often been caused by their own haste. A little prudence can prove beneficial as long as it does not lead to inertia or transformation and innovation constipation.

For the full 1Q10 Pulse survey report and related material, click here.

Filed under: Market Trends and News, Outsourcing by EquaTerra