Today's blog comes from Peter Allen, Partner and Managing Director, TPI.
As we close the books on 2008, it's clear that the outsourcing industry is experiencing a perfect storm of obstacles for the supertanker-sized deals, but the zodiacs are continuing to ride the waves.
Our TPI Index showed strength among the number of contracts, the total contract value, and the annualized contract value for 2008, all exceeding previous years' values. Strong growth during the first half of the year more than offset the slowdown experienced by the industry during late 2008 as a result of the economic environment. Though we're entering the New Year on the heels of a strong 2008, there is hesitation among corporate decision makers who must make long-term commitments for the higher-valued contacts amidst the current economic environment, indicating a headwinds for the industry in the coming months.
Our Index analysis made some comparisons between the recent global economic recession and that of 2001. Wall Street Firms Cut 34,000 Jobs, Most Since 2001 Dot-Com Bust - Bloomberg News
For example, in 2001 we saw a dip in contract awards on the larger end of value spectrum, similar to what we saw in 2008.
But, if we look at the underlying metrics, there's a steady tempo of contracts at the lower end of the TCV spectrum. Outsourcing is still being utilized by many companies to deal with the headwinds of uncertain and declining economic conditions. We think that this "tactical" application of outsourcing services is indicative of the concern over near-term economic health, essentially a move to reduce costs and preserve capital. Conversely, when we see a resumption of some of the higher-valued contract awards it may be the first indication of a broader economic recovery.
I still think that 2009 will be a defining year for outsourcing. We may see some consolidation among service providers and some repositioning of industry-specific and standardized offerings. Ultimately, the Satyam-related anxiety facing the industry will pass Satyam: It was like riding a tiger, not knowing how to get off without being eaten - Horses for Sources, but the focus on operational resilience will move upwards in the corporate agenda.
Divestiture of captives, which we have seen in the financial services sector, is not over, but there is a limit to the service provider community's appetite. Taking on more capacity in times of uncertain demand is risky.
All in all, the stable and nimble ships will ride out the storm and move further up the value chain as a result.
