Saturday, July 28, 2007

Outsourcing market looks healthy in second quarter but capacity constraints linger


While reports continue to cite drops in outsourcing demand growth, EquaTerra's 2Q07 Pulse Survey study shows signs of continued market health. The second quarter study supports EquaTerra research and analysis released earlier in the year, outlining a "reshaping" of the outsourcing market as opposed to a downtrend.

Said Stan Lepeak, EquaTerra’s Managing Director of Research, "The outsourcing market is clearly maturing and growing in new areas, as we’re seeing initiatives of all shapes, flavors and sizes. And while this bodes well for organizations looking to attain the variety of benefits outsourcing can deliver, those who source on a smaller, more distributed basis must safeguard against losing value in the process. Buyers must ensure they leverage their spend and relationships with their providers, appropriately staff their governance processes -- some centrally, some decentrally -- and deploy a comprehensive governance program using the latest techniques and tools."

Signs of continued market health from EquaTerra's 2Q07 Pulse Survey include:

* Global and regional demand: Outsourcing demand was up 50 percent in 2Q07 in the Europe, Middle East, Africa (EMEA) region, and up 37 percent globally, as cited by EquaTerra advisors.

* IT outsourcing: One half of EquaTerra advisors cited IT outsourcing (ITO) as the strongest functional growth area, continuing strong 1Q07 demand trending; demand for ITO in Europe was especially strong during the quarter as demonstrated by the fact that 60 percent of the publicly announced deals of greater than $50 million in total contract value in May and June 2007 were for buyers based in EMEA countries.

* Finance and accounting outsourcing: Another one thirdof EquaTerra advisors cited finance and accounting outsourcing (FAO) as the leading outsourcing demand area; demand is particularly strong in EMEA.

* Public Sector outsourcing: Outsourcing in the public sector is increasing in both North America and Europe, as illustrated by the ~ $20 billion telecommunications outsourcing deal between the U.S. General Services Administration and a Verizon/CSC consortium, and the €1.3 billion+ ITO deal between the Italian Central Government and AlmavivA Group.

* Smaller, "under the radar" deals: The market is experiencing an influx of ~ $1 - $10 million outsourcing engagements, many with clients using a variety of providers; these deals may not be publicly announced, and often remain under the internal radar screen due to their size

Despite the positive market findings, both providers and buyers continue to experience a dearth of talent possessing the skills and experience required to support increasingly complex outsourcing deals. On the service provider side, these talent challenges -- which EquaTerra refers to as "capacity constraints" -- include insufficient experience in sales pursuit, engagement, transition and actual service delivery. Buyers are challenged with a lack of sufficient skills and experience to support transition and ongoing governance requirements. These capacity constraints impact demand growth in some regions and functions, pricing competitiveness, sales cycle, time-to-contract, profitability and satisfaction with the initiative.

Other key findings from EquaTerra’s 2Q07 Pulse Survey include:

* Outsourcing buyers, in general, are more positive about their outsourcing experiences than in past quarters, and are more realistic and sophisticated, especially relative to outsourcing’s ability to deliver innovation and process transformation.

* There is ongoing growth of multi-location global service delivery capabilities.