Deal flow for third-party business and ITO services remained choppy for the second quarter in a row according to EquaTerra advisors polled. While inherent outsourcing demand remains positive and is growing overall, many buyers remain cautious in their efforts, especially when it comes to making upfront investments and entering into complex deal arrangements. Buyers continue strenuous efforts to reduce operating costs and overhaul service delivery models, with internal process improvement and alternative delivery models like shared services gaining in importance as change agents. Cloud computing models, especially Software as a Service (SaaS), are generating significant interest among buyers both as a complement to and in lieu of traditional outsourcing; however, most buyers are still assessing cloud computing opportunities and defining overall strategies.
Business and IT service providers polled in the 2Q10 Pulse survey were less optimistic then they were last quarter on current and near-term demand for outsourcing. While overall market demand continues to grow, the time and effort it takes to close deals on favorable terms and conditions remains high. Improving existing contract profitability is challenging as is expanding scope with existing clients. Demand for non-outsourcing services like consulting and packaged software services remains weak for most providers. While all providers cite long-term opportunities to make money off buyers’ cloud computing initiatives, it is unclear which providers will benefit the most and how much these new revenue streams will offset declining traditional systems integration work and potentially the loss of some traditional outsourcing business.
The reasons cited by both service providers and EquaTerra advisors for this slowing in outsourcing demand growth are similar. Buyers are more carefully weighing all their options, including internal process improvement or doing nothing for the time being. More buyers are pushing for hard – and sometimes too hard – bargains from service providers, especially around pricing. Providers, sensitive to their own profitability and averse to taking on too risky deals or clients, are pushing back on these demands. In some cases buyers find they do not have serious provider competition for their business based on current desired terms and conditions. Most service providers indicate that growing business in existing accounts, where positive relationships already exist and capabilities have been proven, remains more preferable, lower risk and a higher priority in today’s market.
Uncertain economic conditions continue to impact buyers’ decision making processes (see figure below) especially in Western Europe. While there was hope that the global economic recession bottomed out in late 2Q09, recent economic turmoil in Europe, ongoing high unemployment levels, difficult debt situations for both consumers and countries, concerns over a slowing China economy, and stock market turmoil have cast doubt over the strength of the economic recovery in western countries and markets.
- The combined response levels for advisors and service providers show that 49 percent feel market conditions are driving more outsourcing. This level represents a slight increase from last quarter, but is lower than levels registered throughout most of 2009.
- Thirty-nine percent overall indicate that economic conditions are causing buyers to slow or rethink outsourcing decisions. This level is down one percent from last quarter, above the levels registered for most of 2009, and still more than ten percent lower than levels reported 4Q08-1Q09.
- Advisors and providers in Europe are more likely to cite that the economy is slowing outsourcing efforts and deal flow.
For a full analysis, download the full 2Q10 Pulse report.