Today's blog on the state of the outsourcing industry comes from Peter Allen, Partner and Managing Director, TPI.
With the risk of sounding too dramatic, I think that 2008 is going to be a defining year for the outsourcing industry.
Whether the U.S. economy has entered a recession or not is still up for debate. What's certain is that companies in consumer-oriented industries are behaving as if protection of profits and cash flow are much more important than driving growth.
How does this relate to outsourcing?
During a recession corporations turn to their outsourcing providers, currently viewed as partners, for near-term cost savings in the following ways:
Throttle Consumption - Clients are pulling the levers available to throttle consumption of outsourced services, as variability of outsourced service relationships is now a critical tool for controlling costs.
Scope Expansion - Clients are expanding the scope of existing outsourcing relationships to a lower-scope delivery model, positioning for an eventual return to growth as was the case after the 2001 recession.
Our TPI Index covering the Q1 contract awards shows that the pace of outsourcing is remarkable. To wit:
- Overall, the first quarter, and especially the last six months, got the year off to a healthy start that we expect to continue.
- The first quarter did not deviate from recent quarters in terms of number of contacts awarded and total contract value (TCV).
- Performance in the past six months lifted the historical trajectory via TCV, annualized contract value (ACV), and mega relationships boosts, suggesting that 2008 is likely to achieve the TCV levels of the past two years.
- The Americas, while still growing in annualized revenues, is not growing at the faster pace of Europe, Middle East and Africa (EMEA). Underpinned by labor arbitrage and commoditization, smaller contract values, particularly in ITO, and shorter contract durations impact the Americas performance considerably.
- The nature of outsourcing in the Americas has morphed in ways that have a short-term orientation, but that's the behavior one expects in a slowing economy.
- Overall, the first quarter and especially the last six months got the year off to a healthy start that we expect to continue.
More details are available at https://isg-one.com/research/articles/isg-index.
Buckle up!
