EquaTerra Advisor and BPO/ITO Service Provider Pulse Survey

Transcription

Get to what matters.
EquaTerra Advisor and BPO/ITO Service Provider Pulse
Survey Results 2Q08
Featuring Results from the EquaTerra/Economist Intelligence Unit
Globalization Study
Introduction
EquaTerra is pleased to release the findings from its 2Q08
BPO/ITO EquaTerra advisor and service provider Pulse surveys.
Through these surveys, EquaTerra has developed a highly
informative gauge that provides quarterly insights into trends
and projections on the business process and information
technology outsourcing (BPO/ITO) market, gleaned from its
own field advisors as well as leading global BPO/ITO service
providers. EquaTerra’s advisors are the leading experts on
BPO and ITO, and are intimately involved on a daily basis with
buyer organizations actively exploring or undertaking major
outsourcing efforts.
Since their inception in 2004, the EquaTerra BPO/ITO Pulse
surveys have yielded insightful market analyses including
longitudinal comparisons derived from recurring topical
themes. The Pulse surveys capture changes in demand, scope,
capacity and related key market indicators. They highlight
changes, and the direction of change, in the outsourcing
industry as a whole. The surveys focus on where the market
is going and how that future direction is changing – or not –
compared to prior quarters and years.
EquaTerra also incorporates into this research deliverable
additional key quantitative market data and leading indicators
from sources outside the Pulse surveys. These sources include,
but are not limited to, EquaTerra’s own pipeline, interviews
with leading BPO and ITO service providers, and findings from
other EquaTerra market research.
• The role of outsourcing in helping organizations respond
to opportunities and challenges created by globalization
• Key metrics to employ when developing an outsourcing
business case and measuring outsourcing success
• Deal scope, pricing, contract value and profitability
• Sales cycles and ramp-up time
• Service provider pursuit and delivery capacity
Additional market research incorporated into this edition
of the Pulse survey report includes findings from the
globalization market study the Economist Intelligence Unit
conducted on EquaTerra’s behalf. This report also covers
outsourcing’s role in helping organizations address and
respond to the challenges and opportunities globalization
creates, as identified in the market study.
The Pulse surveys focus on BPO – defined as the outsourcing
of multiple, back-office or general and administrative business
processes, vertical industry services and customer care work –
to a third-party service provider, and/or ITO services in either a
standalone arrangement or integrated with BPO. The primary
functional areas covered in the surveys are:
•
•
•
•
•
•
•
Customer care/call center
Finance & accounting
Human resources
Information technology
Knowledge process outsourcing
Procurement
Vertical industry business services
This edition of the advisor and service provider Pulse surveys
reflect BPO and ITO market activity during 2Q08 (April
through June 2008) and projections for the balance of 2008
and into 2009. Topics explored include:
• Demand and buying patterns, including the impact of
the economic downturn on outsourcing demand
Copyright © EquaTerra 2008. All rights are reserved.
EquaTerra Advisor and BPO/ITO Service Provider Pulse Survey Results 2Q08 - Page 1
www.equaterra.com
The following leading global BPO/ITO service providers were polled for this quarter’s sell-side survey:
•
•
•
•
•
•
•
Accenture
ACS
ADP
Capgemini
Ceridian
Convergys
Getronics
•
•
•
•
•
•
•
Hewlett-Packard
ICG Commerce
IBM
Infosys
Logica
Mercer
Outsource Partners International
•
•
•
•
•
Patni Computer Systems
TCS
T-Systems
Wipro
WNS
Distribution of the EquaTerra Pulse survey reports is controlled by EquaTerra, and is intended for internal use and select delivery
to EquaTerra clients, prospects and other marketplace representatives. Questions or comments regarding these surveys should
be directed to Stan Lepeak, Managing Director of Research, at stan.lepeak@equaterra.com or +1 203 458 0677.
www.equaterra.com
* Please note this PDF
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on “Bookmarks” tab to
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Table of Contents
I.
II.
III.
IV.
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Highlights – EquaTerra Advisors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Highlights – BPO/ITO Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Market Demand and Market Trends Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 1 - Advisors: Market Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 2 - Service Providers: New Deal Pipeline Projections . . . . . . . . . . . . . . 7
Figure 3 - Service Providers: Demand Next Quarter . . . . . . . . . . . . . . . . . . . . 8
Figure 4 - Weighted Aggregate Market Demand: Advisors & SP’s. . . . . . . . . . 8
Economy’s Impact on Outsourcing Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Figure 5 - Economic Environment’s Impact on Outsourcing. . . . . . . . . . . . . . 9
V. Demand Trends by Functional Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 6 - Advisors: Demand by Functional Area. . . . . . . . . . . . . . . . . . . . . . . 10
Figure 7 - Service Providers: Demand by Functional Area. . . . . . . . . . . . . . . . 11
VI. Demand Trends by Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Figure 8 - Advisors: Demand by Industry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Figure 9 - Service Providers: Demand by Industry. . . . . . . . . . . . . . . . . . . . . . 13
VII. The Role of Outsourcing in Addressing Globalization Challenges. . . . . . . . . . . . . 14
Figure 10 - Biggest Overall Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Figure 11 - Opportunities from Globalization . . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 12 - Challenges from Globalization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 13 - Outsourcing’s Role in Responding to Globalization. . . . . . . . . . . . 17
VIII. Building an Outsourcing Business Case – Process & Metrics . . . . . . . . . . . . . . . . . 18
Figure 14 - Most Important Metrics for Business Case. . . . . . . . . . . . . . . . . . . 19
Figure 15 - Business Case Development Skills . . . . . . . . . . . . . . . . . . . . . . . . . 19
IX. Sales Cycle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Figure 16 - Service Providers: Sales Cycle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
X. Pricing Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Figure 17 - Service Providers: Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
XI. Deal Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Figure 18 - Service Providers: Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
XII. Service Providers: Contract Profitability and Ability to Increase Scope . . . . . . . . 23
Figure 19 - Service Providers: Contract Profitability. . . . . . . . . . . . . . . . . . . . 24
Figure 20 - Service Providers: Ability on Increase Scope . . . . . . . . . . . . . . . . 24
XIII. Service Provider Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Figure 21 - Advisors: SP Capacity Overall. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Figure 22 - Advisors: SP Capacity, Pursuit . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Figure 23 - Advisors: SP Capacity, Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Figure 24 - SP Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
XIV. Update on Outsourcing Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Measuring Outsourcing Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Figure 25 - Key Metrics to Measure Outsourcing Success. . . . . . . . . . . . . . . 29
Figure 26 - Buyer Success at Capturing Key Metrics . . . . . . . . . . . . . . . . . . . 30
XV. Service Provider Market Update. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Deal Snapshot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Top Deals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
XVI. Service Providers: Current Deal Portfolio Status. . . . . . . . . . . . . . . . . . . . . . . . . 32
Figure 27 - SP re-competes and renegotiations . . . . . . . . . . . . . . . . . . . . . . 33
Figure 28 - SP cancellations and now-renewals. . . . . . . . . . . . . . . . . . . . . . . 33
Figure 29 - SP problem contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
XVII. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Appendix - Key Questions by Advisors’ Primary
Geography and Outsourcing Focus Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
About EquaTerra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
www.equaterra.com
Highlights – EquaTerra Advisors
Overall BPO/ITO Market Demand
Fell back again; 38 percent of advisors cite increased demand, down 14
percent quarter over quarter (Q/Q), but up 8 percent year over year (Y/Y);
13 percent cite demand drop (survey high)
Economy’s Impact on Outsourcing
51 percent cite economic climate is driving more outsourcing, but 28
percent (up from 15 percent last quarter) indicate it’s slowing demand
Role of Outsourcing in Response to Globalization
Outsourcing’s ability to help create more flexible cost and operating
models, and make processes more efficient and effective, cited as key
means to address globalization
Buyer Outsourcing Business Case Challenges
Assessing indirect/shadow costs and estimating costs to achieve desired
improvements cited as top challenges when building outsourcing business
cases
Service Provider Capacity - Pursuit
Continues to improve; constrained/ tightening fell to 12 percent (survey
low)
Service Provider Capacity - Delivery
Shortage continues; 37 percent cite constrained/tightening
Measuring Outsourcing Success
SLA levels and user satisfaction cited as the top metrics for measuring
outsourcing success
Leading Market Segments
1.
2.
3.
ITO
FAO
HRO
Leading HRO Segments
1.
2.
3.
Payroll
Benefits
HRIT
Leading FAO Segments
1.
2.
3.
AP
AR/C&C
General Accounting
Leading ITO Segments
1.
2.
3.
ADM
Infrastructure/Ops
Desktop Services
Leading Procurement Segments
1.
2.
3.
AP
Strategic Sourcing
Order Management
Leading Industries
1.
2.
3.
Pharma/Biotech
CPG
Energy/Utilities
Market demand cooled again this quarter, negatively impacted by the continuing problematic economic climate. But the longer
term expectation remains that economic challenges and ongoing globalization will drive more outsourcing. ITO remains the
strongest functional area of demand, followed by FAO. Service provider capacity shows mixed signs with continuing delivery
capacity constraints, creating ongoing problems for both services providers and buyers.
www.equaterra.com
Highlights – BPO/ITO Service Providers
New Deal Pipeline Growth
Improving; 52 percent of service providers cite increases, up 10 percent
over quarter (Q/Q) and 14 percent year over year (Y/Y)
Demand Next Quarter
Slipped; 45 percent expect increases, down 5 percent Q/Q and 10 percent
Y/Y
Economy’s Impact on Outsourcing
65 percent cite economic climate is driving more outsourcing, up 27
percent Q/Q
Role of Outsourcing in Response to Globalization
Service providers concur with advisors on the top ways in which
outsourcing can help buyers address globalization
Sales Cycle
Steady
Pricing Competitiveness
Stable; 35 percent cite more aggressive, down 10 percent Q/Q, steady Y/Y
Deal Scope
Some increases in scope; 50 percent cite increases, up 31 percent Q/Q, 26
percent Y/Y
Contract Profitability
Stable; 68 percent cite no change, 26 percent improving
Ability to Increase Current Contract Scope
Improved; 74 percent expect increases, up 21 percent Q/Q and above
survey average
Service Provider Capacity
Constricting; 35 percent cite adequate levels, down 29 percent Q/Q, 45
percent cite tight capacity
Service providers concur with advisors on the top metrics for measuring
outsourcing success
Leading Market Segments
1.
2.
ITO, FAO
HRO
Leading HRO Segments
1.
2.
3.
Payroll
Benefits
Recruiting/Training
Leading FAO Segments
1.
2.
AR/C&C, AP
General Accounting
Leading ITO Segments
1.
2.
ADM, Infrastructure/Ops
Desktop Services
Leading Procurement Segments
1.
2.
Order Management, Strategic Sourcing2.
AP
Leading Industries
1.
2.
3.
Financial Services
CPG
Manufacturing, Pharma/Biotech
Service providers’ pipelines and expectations for future demand growth rebounded in the quarter, showing renewed optimism
for the balance of 2008 and 2009. Deal scope improved and pricing pressure stabilized. Challenging economic times are
impacting deal flow, but less so than in prior quarters, and longer term demand is stronger. The economy and ongoing
globalization are expected to continue to fuel longer term outsourcing demand.
www.equaterra.com
Market Demand and Market Trends Update
Change in demand growth for both BPO and ITO remained positive but fell back for
the second straight quarter, according to EquaTerra advisors polled in the 2Q08 Pulse
survey (see Figure 1).
• Thirty-eight percent of advisors indicated demand levels were up for the
quarter, down 14 percent from 1Q08 but up eight percent over 2Q07. This level
is also below the average “up” rating of 56 percent over the life of the survey.
• Thirteen percent of advisors indicated demand levels had declined in the
quarter, the highest level recorded in the life of the Pulse survey
• Advisors who support global outsourcing efforts and those in the Americas
were more likely to cite up demand than those supporting work in EMEA
(Europe, Middle East, Africa)
• Advisors who primarily support HRO were less likely to cite growing demand,
and more likely to cite declining demand
See the appendix for a complete break-out of advisor Pulse results by geography and
type of outsourcing supported.
Advisors: Market DemandF
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Down
Flat
Up
Figure 1
EquaTerra still expects overall demand and growth levels for BPO and ITO in 2008
will exceed those in 2006 and 2007. Current uncertainty in the economies of many
Western nations and markets, particularly the United States, will slow and in some
cases disrupt deal flow in the short term; longer term, the economic uncertainties
will drive more outsourcing demand. The impact of the economy on outsourcing
demand and the drivers for outsourcing are discussed in more detail below.
BPO and ITO service providers polled were more positive on new deal pipeline
growth projections (see Figure 2) than advisors were on demand growth.
• Service providers characterizing their pipelines as up rose 10 percent this
quarter, to 52 percent. This level was up 14 percent year over year and just
below the survey average of 56 percent.
www.equaterra.com
• EquaTerra finds service providers continue to indicate they are more positive
on pipeline growth than they were one year ago, except for multi-process HRO
deals
• Less than 10 percent of services providers cited a decline in pipeline growth
Service Providers:
New
Deal Pipeline
Projections
Fi
S i P id
P I ON
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Down Q/Q
About the same
Up Q/Q
Figure 2
There are no major variations on pipeline growth assessments based on the profile
of the service providers polled. Results are more a function of specific service
provider situations and their existing market traction and capacity levels, rather than
functional outsourcing areas served.
Service providers were somewhat less optimistic on future outsourcing demand
growth (see Figure 3).
• Forty-five percent of service providers polled expect an increase in demand
next quarter, down from 50 percent last quarter and below the survey average
of 66 percent
• Ten percent expect demand to decline next quarter, over double the survey
average
• Please note this question is a measure of change in demand growth quarter
over quarter, not absolute demand levels
www.equaterra.com
Service Providers:
Demand
Next Quarter
F
S i
id
D
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Decrease
Flat
Increase
Figure 3
The final chart in this section (see Figure 4) highlights general demand trending over
the past 14 quarters. The weighted average is calculated based on response levels
from both advisors and service providers for each quarter. Any aggregate totals
above the line indicate overall market growth, while totals below the line indicate
market contraction. Service providers this quarter were more positive on demand
than advisors were for the first time since 2Q07.
Weighted Aggregate
Market Demand: Advisors & SP’s
Fg
W i t
&
Market Growth
Market Contraction
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Advisors
Service Providers
Figure 4
Economy’s Impact on Outsourcing Demand
EquaTerra polled advisors and service providers in 1Q08 and 2Q08 on how the
current slowing or recessionary trending in Western economies was impacting
outsourcing demand levels (see Figure 5).
• Last quarter, advisors were more likely than service providers (55 to 51 percent)
to indicate economic conditions were driving more outsourcing
www.equaterra.com
• Things flipped this quarter, with 65 percent of service providers indicating the
economy is driving more outsourcing as compared to 38 percent of advisors
• Twenty-eight percent of advisors, compared to 15 percent 1Q08, indicated the
economy is causing buyers to slow or rethink outsourcing plans
• Advisors primarily supporting BPO efforts were more likely to cite increased
outsourcing demand
• Advisors in EMEA were more likely to indicate the economy was slowing
outsourcing plans
Economic Environment’s
Impact
on Outsourcing
E
m '
t I
t
Little/no impact
SP 2Q08
Slowing/rethinking
g/
g outsourcingg p
plans
SP 1Q08
Adv 2Q08
Adv 1Q08
Driving more outsourcing
0%
10%
20%
30%
40%
50%
60%
70%
Figure 5
Further elaborating on this trending, both advisors and service providers agreed
the economic impact on outsourcing varied significantly across different industries.
Deal flow and the sourcing decision making process at some organizations is being
disrupted as buyers are distracted by other more pressing issues like stabilizing
operations or dealing with executive management changes. Outsourcing efforts
focused on complex process transformation or requiring large upfront investments
are more likely to get put on hold. In contrast, efforts with short term (<12 month)
ROI or that deliver quick cost savings are going forward, often at an accelerated
pace.
Advisors and service providers also agreed that longer term – 2H08 and into 2009
– outsourcing demand would increase because of economic conditions. Consensus
was the impact on other more discretionary types of business and IT services, such
as consulting, systems integration and some application development, continues to
experience a stronger negative impact from economic conditions.
www.equaterra.com
Demand Trends by Functional Area
EquaTerra advisors cited demand trends by functional area (e.g., F&A, HR and IT) as
continuing in the same direction in 2Q08 as in the past few quarters (see Figure 7).
ITO was the strongest functional demand area, followed by FAO and HRO. Demand
for multi-process HRO (more than two processes outsourcing simultaneously to the
same service provider) continues to fall, while demand for one or two process HRO
remains much stronger. Although some buyers are still conceptually interested in
larger, multi-process and global HRO deals, they are reluctant to pursue them given
mixed results these deal types have generated to date. Additionally, the service
providers with the potential to deliver these deals often have limited interest in
pursuing them given the problems they have experienced with previous similar
efforts.
Advisors: Demand byF Functional
Area
6
i
ITO
O
FAO
HRO
2Q08
2Q07
CC/CRM
2Q06
h
Other
Procurement
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Figure 6
[*Note: EquaTerra recently changed how its advisors rank process area demand. In
quarters prior to 3Q06, advisors ranked each process area sequentially (one through
six) in terms of demand, which led to a cumulative ranking. As of 3Q06, advisors
selected areas of greatest demand, creating an aggregate ranking. This same ranking
process is employed in the service provider polling.]
A review of EquaTerra’s own pipeline reinforces these broader market rankings. As of
the end of June 2008, the top functional areas represented in the pipeline in terms
of absolute number of opportunities (not ultimate total contract value) distributed
across the major functional areas were as follows:
•
•
•
•
•
•
IT: 51 percent
HR: 15 percent
Multi-tower: 14 percent
F&A: 5 percent
Procurement: 2 percent
Other: 13 percent
www.equaterra.com
An assessment of the pipeline for deals likely to close later in 2008 and into 2009
shows an uptick in both HRO and multi-tower outsourcing demand. ITO deals are the
more likely to close in the nearer term.
Service providers’ and EquaTerra advisors’ functional demand rankings were generally
in sync in 2Q08 (see Figure 8). ITO was the leading area of demand cited by service
providers, followed by FAO and HRO. EquaTerra attributes the somewhat higher HRO
levels indicated by service providers, in comparison to those cited by advisors, to
the sample mix of respondent service providers this quarter, as a larger number of
service providers targeting one or two process HRO deals were polled in 2Q08.
Service Providers: Demand
byc Functional
Area
i
7
i
ITO
O
FAO
HRO
2Q08
2Q07
Other
2Q06
/
CC/CRM
Procurement
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Figure 7
EquaTerra continues to see an increase in both demand and supply for outsourcing
services beyond general and administrative back-office functions. These new areas
include knowledge process outsourcing (KPO) for functions such as engineering,
research and development, analytics and legal process work, and financial modeling
and analytics. Some of these functions are specific to certain industries, like drug
development and clinical trials services in the pharmaceutical market. There is also
growth in outsourcing supply and demand in areas like document services, facilities
and real estate management, and logistics services. Please refer to prior quarterly
Pulse survey reports for more details on demand trends in these outsourcing areas.
The charts on the following two pages illustrate outsourcing demand by process area
for the four major functional areas polled in the Pulse surveys. Demand level rankings
remain relatively consistent quarter over quarter. One exception is with recruitment
process outsourcing (RPO), which is becoming more popular. For details on the
current state of the RPO market, please click on the following link to read a recent
EquaTerra research Perspective paper: http://www.equaterra.com/KR/research/
HR%20Market%20Update-%20A%20Three-Part%20Series-hr.aspx
Advisors: Functional and Process Area Demand
Service Providers: Functional and Process Area Demand
Advisors - HRO Demand
Service Providers - HRO Demand
Payroll
y
Payroll
Benefits
Benefits
HR IT
Recruit/Tal. Mgmnt
Recruiting/Talent Mgmnt
2Q08
Learning/Training
g/
g
2Q07
2Q06
Workforce Effectiveness
HR IT
2Q08
2Q07
Compensation
2Q06
Learning/Training
Compensation
p
Workforce Eff.
Expatriate & Relocation
Exp & Relo
Other
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
Advisors - FAO Demand
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Service Providers - FAO Demand
Accounts Payable
AR/C&C
AR/C&C
Accounts Payable
General Accounting
General Accoutning
2Q08
Travel & Entertainment
2Q07
2Q06
Finance Control Risk Mgmnt
Other
2Q08
Fin Control Risk Mgmnt
g
2Q07
2Q06
Travel & Entertainment
Decision Support
Decision Support
Other
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
Advisors - ITO Demand
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Service Providers - ITO Demand
ADM
ADM
Infrastructure/Ops
Infrastructure/Ops
Desktop Services
Desktop Services
2Q08
2Q07
Networks/Telco
2Q06
2Q08
k
d Apps Svcs
Packaged
k / l
Networks/Telco
Other
Other
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2Q07
Packaged Apps Svcs
2Q06
0%
Advisors - Procurement Outsourcing Demand
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Service Providers - Procurement Outsourcing Demand
AP
Order Mgmnt/Trans Processing
Strategic Sourcing
Strategic Sourcing
Order Mgmnt
AP
Category Mgmnt
Category Mgmnt
Fixed Assets
Req.Approval
2Q08
Mgmnt/Admin.
2Q07
Req. & Approval
Mgmnt/Admin.
Fin. Rep./Analysis
/
l
Receiving/Inventory
/
Receiving/Inventory
Fixed Assets
Other
2Q08
Fin. Rep./Analysis
2Q07
Other
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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Demand Trends by Industry
The two charts below illustrate industry demand as cited by EquaTerra advisors and
polled service providers. Industry rankings have been generally consistent between
the two groups over the past few quarters.
Advisors: Demand byi Industry
8
v
Pharma/Biotech
CPG Food/Bev,
F d/B Retail,
R t il Wholesale
Wh l l
CPG,
2Q08
Energy/Utilities
gy/
, Oil & Gas
2Q07
2Q06
Banking, Fin Svcs, Insurance
Govt (Fed, State, Local), Edu
0%
10%
20%
30%
40%
50%
60%
70%
80%
90% 100%
Figure 8
Service Providers:
Demand by Industry
Fi
i
D
Banking, Fin Svcs, Insurance
CPG Food/Bev,
F d/B Retail,
R t il Wholesale
Wh l l
CPG,
2Q08
Manufacturingg
2Q07
2Q06
Pharma/Biotech
Energy/Utilities, Oil & Gas
0%
10%
20%
30%
40%
50%
60%
70%
80%
90% 100%
Figure 9
Demand in the banking, financial services and insurance industry group fell according
to EquaTerra advisors, but service providers remain more optimistic on demand
in this market segment. There has been much speculation on how the mortgage
and credit crises are impacting services spend. EquaTerra still believes demand for
outsourcing in the financial services market will grow in 2009, though demand for
other types of more discretionary services like consulting will fall.
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Public sector demand cited by EquaTerra advisors includes outsourcing, process
improvement efforts and support for the deployment of shared services. While ITO
demand remains strong within the public sector, service providers are winning a
diverse range of deals beyond back-office services, including training, operational
support and supply chain management work. EquaTerra recently completed a
U.S. public sector service provider Pulse survey. Please contact EquaTerra research
(research@equaterra.com) to obtain the full results from this market study.
The Role of Outsourcing in Addressing Globalization
Challenges
EquaTerra recently commissioned the Economist Intelligence Unit to conduct a
market study on how large buyer organizations are addressing and responding to
globalization. Please follow this link to access an executive summary of the study’s
results: http://www.equaterra.com/kr/research/The-Benefits-and-Challenges-ofGlobalization-all.aspx
The study surveyed 217 global executives with the following profiles:
• 64 percent C-Suite level
• 46 percent based in North America, 39 percent in Western Europe, 15 percent
in rest of world
• All major industries
• All major functional groups/roles
• 42 percent $5+ billion revenue
• The market study focused on the following points:
• The major challenges facing these executives and their organizations over the
next three years
• The future growth levels and pace of globalization
• The challenges and opportunities created by increased globalization
• How these executives and their organizations are responding to, and taking
advantage of, the challenges and opportunities
Overall, 90 percent of executives polled indicated globalization was inevitable, and
77 percent felt its pace will accelerate. Seventy-two percent felt globalization would
have a positive overall impact on their organization. Given the perceived inevitability,
the bulk of the market study then focused on how globalization was impacting the
strategy and operations of these organizations.
Figure 10 illustrates the biggest overall challenges facing these executives and their
organizations over the next three years. Highlights include:
• Finding and retaining high quality talent was the greatest challenge identified,
as cited by 44 percent of respondents overall. It was the top challenge cited
by North American respondents, and the third greatest challenge cited by
Western European respondents. The latter group’s top cited challenge was
funding new business initiatives, followed by continued growth of competition
in their industry.
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• Growth of the competition was the second most frequently identified
challenge, cited by 36 percent of overall respondents
• Growing the business ranked third, as identified by 34 percent of respondents
Biggest Overall Challenges
i
Finding and retaining highͲquality
high quality talent
44%
Continued growth of competition in my industry
36%
Growing the business
34%
Cutting costs
31%
Funding new business initiatives/entering new markets
31%
Enabling process improvement/transformation
27%
Enabling organizational innovation
23%
Regional/global economic recession
20%
Supporting regulatory compliance efforts
13%
4%
Other
Don t know
4%
1%
Figure 10
As most executives felt globalization would ultimately benefit their organization,
it is important to identify the key opportunities they expect globalization to offer
their firms. Identifying and assessing the true nature of these opportunities is also
important as globalization is viewed by some as a negative trend. Two often cited
negative impacts are that globalization causes – or is perceived as causing – wages
of Western workers to stagnate or decline, and that it increases the likelihood
or more jobs moving offshore. While these are certainly true in some cases, the
pervasiveness and ramifications of these impacts is harder to measure.
Figure 11 illustrates the top opportunities cited as a result ongoing globalization.
Highlights include:
• In contrast to a focus purely on reducing costs and moving work abroad, the
top benefit cited by respondents was the opportunity to expand into new
markets. This was the number one ranked opportunity identified by both
North American and Western European respondents, as well as both C-Suite
and non-C-Suite respondents.
• A distant second, coming in at 40 percent, was globalization may improve our
company’s brand exposure and sales in foreign markets
• Accessing lower cost labor abroad was cited by 31 percent of respondents, just
one percent higher than the number of respondents who identified accessing
skilled labor abroad. This highlights that the search for global labor has become
as much of a search for quality as for lower costs.
• The impact of globalization to lessen labor costs in the home market was
identified by just 13 percent of respondents
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Opportunities from Globalization
i
11 O
64%
Creates opportunities to expand into new markets
40%
Improve our brand exposure/sales in foreign markets
Creates new directͲinvestment opportunities abroad
31%
Widens access to lower cost labor abroad
31%
Widens access to skilled labor abroad
30%
14%
Increases the inflow of investment/funding from abroad
13%
Lessens labor costs in home market
8%
Easier to find/retain local staff with required skills/experience
Other
3%
Don t know
2%
Figure 11
While these findings represent the position of management, not workers, being
impacted by globalization, they highlight a different perspective on the changes
globalization is driving. Executives view globalization as a means by which they can
expand the market for their firm’s good and services. This is very much a growthoriented view of globalization, as opposed to a reactive or tactical view concentrated
on just lowering costs.
But globalization also creates serious challenges for Western organizations. The top
challenges are presented below in Figure 12.
Challenges from Globalization
Fi
1
Competitors with a lower cost base
49%
Competitors that do not “play by the rules”
36%
Drives down the price of my organization s
products/services
32%
Increases the pressure to expand into foreign markets
30%
More difficult to find/retain local staff with required
skills/experience
kill /
i
22%
Fragments the target market
18%
Competitors with greater access to skilled labor
18%
Competitors with greater access to capital
Other
Don t know
15%
6%
3%
Figure 12
• The number one challenge cited by 48 percent of respondents overall was
that globalization produces competitors with a lower cost base. This was of
greater concern to Western European (55 percent) than to North American
respondents (44 percent). One reason for the geographical disparity is
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that aggressive cost-cutting, in part through more extensive use to date of
offshoring, is more commonplace in North American organizations.
• The second most frequently cited globalization challenge was that it produces
competitors who do not “play by the rules.” For example, gaining undue
benefits from “dumping”, currency manipulation, government subsidies, or
illicit intellectual property practices. This challenge was of somewhat less of a
concern to Western European respondents than to those in North America.
• Western European respondents were more concerned about globalization
driving down the price of their organization’s products/services
• While expanding into foreign markets was clearly identified above as an
opportunity, 30 percent of respondents felt globalization increases the
pressure to undertake this expansion
It is important to note these are challenges identified primarily by Western
organizations. While the sample of study respondents in emerging markets was
smaller, the differences in challenges they identified as compared to those cited by
Western respondents is telling. Challenges cited by emerging market respondents
included concerns over the ability to retain local staff as Western firms enter their
markets, and the fragmentation of the local market as new, non-local competitors
emerge. These findings highlight that the opportunities and challenges created by
globalization cut both ways.
While this globalization market study did not specifically focus on outsourcing, there
are many clear examples of how buyers can use outsourcing to take advantage of
the opportunities and respond to the challenges created by globalization. EquaTerra
polled both its advisors and leading service providers on what they felt outsourcing’s
role is in responding to globalization. These findings are illustrated in Figure 13.
Outsourcing’s Role
in Responding
to Globalization
Fi
Ou
i ' R
R
i
Create more variable/flexible cost/operating model
Improve bus. process efficiency/effectiveness
Enable shift to more strategic activities
Access lower cost resources in emerging markets
Lower overall cost base
Access skilled resources in emerging markets
SP'ss
SP
Advisors
Help make needed IT investments
Decrease reliance
l
on local
l l labor
l b pools
l
Springboard to enter into new emerging markets
Other
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Figure 13
• The top role for outsourcing in helping buyers respond to globalization, as
identified by both advisors and service providers, is creating more variable
and flexible cost and operating models. Outsourcing enables buyers to rely
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on third-party service providers for a broader array of services. These buyers
can more easily “dial-up” and “dial-down” services consumption than if the
resources to perform the work were internal to their organizations.
• Over 40 percent of polled advisors and services providers identified improving
business process efficiency and effectiveness as a means by which buyers can
use outsourcing to respond to globalization. This was the top cited activity
organizations are undertaking to respond to globalization.
• The biggest difference of opinion between advisors and services providers on
outsourcing’s role in helping buyers respond to globalization was in accessing
lower cost resources in emerging markets. The low ranking given this role by
service providers is a bit perplexing, and perhaps somewhat self-serving.
Overall, findings from the Economist Intelligence Unit market study and EquaTerra’s
Pulse survey show that globalization will continue to push forward and likely
accelerate. While it creates challenges for Western organizations, it also presents
clear opportunities, particularly in expansion into new and growing markets. There is
much that Western organizations can and must do to respond to globalization, and
outsourcing will prove a key tool in these efforts.
Building an Outsourcing Business Case – Process & Metrics
The business case is a key foundational element of any successful outsourcing effort.
EquaTerra often finds, however, that buyers’ business cases are too often incomplete,
based on inaccurate cost and performance data, or are ultimately not accurately
reflected in the signed contract. Even when a solid business case is constructed, it
is often difficult for organizations to stick to the outlined goals and objectives as
they navigate through the service provider selection, negotiation and contracting
processes.
The first steps in developing a solid business case are recognizing the importance
of doing so and applying adequate and skilled resources to the task. The next step
is identifying the key metrics to define and assess as core business case elements.
EquaTerra polled its advisors in 2Q08 on what they see as the most critical metrics to
assess when developing an outsourcing business case. These metrics are identified in
Figure 14.
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Most Important
Metrics
for Business
Case
Fi
1
I
t
C
Current
performance
f
levels
l l
75%
Current direct costs
74%
Current indirect costs
44%
Cost per Resource Unit
38%
Current # of FTE's
23%
Current user satisfaction levels
20%
Process costs as a % of revenue
Cost per FTE
16%
8%
Figure 14
• Assessing current business process performance levels and direct cost levels for
the functions and processes under consideration for outsourcing were the top
metrics identified, as cited by three quarters of advisors polled
• Current indirect or “shadow” costs, often an under-estimated component or
total costs, ranked third
• While EquaTerra advises buyers to attempt to accurately capture all
these metrics when developing an outsourcing business case, there is an
acknowledged prioritization effort to this process
EquaTerra also polled its advisors on the typical levels of success buyers have with
undertaking various aspects of outsourcing business case development. Figure 15
shows these rankings, and can serve as a useful checklist for buyers undertaking a
business case development initiative in terms of both where should they focus their
efforts and where are they more likely to run into challenges.
Business Case Development
Skills
i r 5
i
Getting exec support to build business case
2.96
Assessing est. total performance improvements
2.66
Assessing estimated total cost savings
2.62
Assessing
direct costs
A
i currentt di
t
2 62
2.62
Assessing current performance levels
2.45
Assessing est. total costs to achieve improvements
Assessing current indirect costs
2.39
1 98
1.98
Figure 15
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• Getting active and visible executive support for developing an outsourcing
business case was the activity in which buyers typically have the most success.
On a one-to-five scale, where one represents not at all successful and five very
successful, this activity was ranked at a 2.96. So, while it is the task most likely
to be successfully completed, the relatively low ranking shows there is still
much room for improvement.
• Assessing total costs to achieve the desired improvements from outsourcing, as
well as current indirect or shadow costs, were the two business case activities
buyers typically have the most challenges with successfully completing.
But failure to do so can lead to major problems in an outsourcing effort.
An inaccurate base case can cause unrealistic cost savings assumptions.
Underestimating how much it will cost to achieve outsourcing goals either
means those goals do not get fully achieved or more funds are required to do
so, further eroding expected cost savings.
Clearing defining business case requirements, including defining which metrics to
capture and analyze and accurately doing so, is critical to outsourcing success often more so than which service provider is selected. It is an area in which many
outsourcing buyers need to improve their capabilities. While this need to improve
is nothing new, it is more an imperative as the frequency, breadth and scope of
sourcing efforts expands.
Sales Cycle
For the purposes of the Pulse surveys, the sales cycle is defined as the time period
from RFP release to contract signing. Many factors contribute to the length of the
sales cycle, including:
•
•
•
•
What is being outsourced
Level of buyer sophistication and experience
Complexity, size and regional/global reach of the potential outsourcing deal
Number of service providers competing and the structure of the sourcing
process
• Preferred service provider sales pursuit capacity and selectivity
• Whether a sourcing advisor is being used
• Disruption to the sourcing process by turmoil in the buyer account, economic
uncertainty, or changing macro-business – all heightened issues in the current
market
The Pulse surveys do not measure the absolute length of sales cycles. EquaTerra
estimates, however, that for larger deals (those with more than $50 million in total
contract value, or TCV) which are competitively bid, the sales cycle is typically six to
12 months from the time the buyer goes to the market until the deal is closed.
Current market trends are contributing to both shortening and lengthening sales
cycles, and in some cases, the trends cancel each other out. Smaller deals pursued
by more experienced buyers can lead to shorter sales cycles. On the other hand, the
complexities associated with multi-sourcing can complicate the sourcing process and
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extend the sales cycle, as can consideration of more intricate pricing arrangements.
Global deals are also more complex to source. Some of the lengthening of sales
cycles is cyclical. A shorter or longer sales cycle, however, is not necessarily a good or
bad thing from the buyer’s perspective.
Figure 16 illustrates a flat sales cycle trend, according to service providers polled.
An equal and small number (15 percent) indicated sales cycles were lengthening or
shortening, while the balance (70 percent) indicated sales cycles were staying the
same length.
Service Providers: Sales Cycle
u 1
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Shortening
Same
Lengthening
Figure 16
EquaTerra would expect some selective lengthening of the sales cycle in the current
market environment. Disruptions continue to occur in the sourcing process in some
deals, especially in industries currently in flux like financial services. Counteracting this
trend is the move toward smaller deals that inherently have shorter sales cycles.
Pricing Competitiveness
Increasing pricing competitiveness implies the buyer has the upper hand and is
getting a better priced outsourcing deal. As pricing is one element of determining
profitability, less competitive pricing is generally favorable to the service provider.
Service providers can also impact pricing competitiveness by the extent of their
own aggressiveness, or over-aggressiveness, in pursuing deals based on price (e.g.,
attempting to “buy” the business). Improved sales process oversight has been one
way most major service providers have addressed this problem. The biggest factors
impacting service provider pricing levels today are the pervasiveness of global service
provisioning, the impact of exchange rates on local market pricing – especially in the
U.S. market – and increasing overall market competitiveness. These trends have a
greater impact on ITO deals than on BPO engagements.
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• EquaTerra did not poll its advisors on pricing competitiveness in 2Q08.
Historically, however, advisors who primarily support ITO see more aggressive
pricing, while those who support BPO see less aggressive pricing.
• Service providers polled in 2Q08 indicated that pricing pressure cooled
somewhat in the quarter (see Figure 17). Thirty-five percent of service providers
indicated pricing had become more aggressive, down 10 percent quarter over
quarter and in line with 2Q07 levels.
• Just five percent of providers indicated pricing was becoming less aggressive
Service Providers:
Pricing
Fi
7 S r
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
More Aggressive
Same
Less Aggressive
Figure 17
Deal Scope
Deal scope is defined as the number of processes, users, geographies, etc., included
in an outsourcing arrangement. Contract value is usually directly correlated to scope,
though the mix of remote/low-cost delivery resources involved also impacts contract
value. From the outsourcing buyer’s perspective, understanding trends in scope and
contract value helps not only to determine how aggressively other organizations are
pursuing outsourcing, but also how to define and construct a viable and potentially
optimal-sized deal. It is also important for buyers to note the ongoing decline of
mega-deals (deals with more than $1 billion in TCV), though market growth has
sustained through an increased number of smaller and multi-provider deals.
• EquaTerra did not poll its advisors on deal scope in 2Q08. Scope levels were flat
to declining for the past several quarters during which advisors were surveyed.
• Scope levels rebounded strongly in 2Q08 according to service providers polled.
Fifty percent indicated an increase in scope levels, a jump of 19 percent over
last quarter (see Figure 18). This is the highest level recorded since 4Q05.
• Most of the respondents who cited scope increases were India-based providers.
This highlights the growth in typical deal size this class of providers is winning
in ITO. Relative to BPO, most Indian providers are still focused on smaller deals,
though they are ramping up capabilities. So while deal scope size is increasing
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for Indian providers, actual deal size, on average, is often still smaller than
historical levels, particularly in HRO.
• Fifteen percent of service providers indicated scope size had decreased, down
from 24 percent last quarter and slightly above 2Q07 levels
Service Providers: Scope
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Increased
Same
Decreased
Figure 18
Service Providers: Contract Profitability and Ability to
Increase Scope
A variety of factors impact service provider profitability, including deal scope,
transition costs and time frames, and buyer pricing sophistication. Wage inflation
and exchange rates continue to negatively impact service provider profitability,
particularly firms with extensive India-based operations. Service providers with a
higher mix of remote/low-cost resources are also putting pressure on the profitability
of competitive peers with fewer lower-cost resources. Here the playing field is
leveling as all top service providers become more global in their delivery capabilities.
It is important to note the Pulse survey question on profitability addresses existing,
executed contracts, not new deals in the pipeline.
• After several quarters of declining profitability, levels cited by service providers
have remained flat over the past four quarters (see Figure 19)
• Twenty-six percent of service providers cited improved levels of profitability,
down four percent from last quarter and nine percent from 2Q07. This level is
also well below the survey average of 42 percent.
• A large majority of providers (68 percent) saw no change to existing contract
profitability. So while service providers’ profitability did not significantly
improve, the findings indicate providers are protecting profitability gains made
in earlier quarters.
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Service Providers: Contract
Profitability
F
i P
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Improving Profitability
Same Amount
Declining Profitability
Figure 19
• Service providers regained their historic optimism about their ability to increase
deal scope within current client accounts (see Figure 20)
• Seventy-four percent of service providers expected to increase scope in current
accounts, up 22 percent quarter over quarter and 26 percent year over year.
This represents the highest level since 3Q06, and is above the survey average
of 68 percent.
• While similar to deal scope above, India-based service providers were optimistic
on their ability to increase scope in existing accounts, but this sentiment was
also shared by other classes of providers
• No service providers indicated scope would decline in existing accounts
Service Providers: FAbility
on Increase
Scope
20
P i
A il
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Increase
Remain Contstant
Decline
Figure 20
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Service Provider Capacity
Service provider capacity is an important factor that impacts other trends such
as pricing competitiveness, sales cycle and profitability. EquaTerra defines service
provider capacity as the availability of adequate and skilled resources for sales
pursuit, engagement and transition/delivery. Capacity constraints are often more
prevalent in BPO than ITO as the BPO market is less mature, and in some respects,
more complex. The challenge service providers face is that quality capacity is in
scarce supply and takes time – and multiple outsourcing deals – to develop.
Capacity is also tightly linked to service provider aggressiveness in deal pursuit. When
service providers are being more selective and entering into fewer deals, as is often
the case in today’s BPO market, they need less capacity for pursuit and delivery.
Thus, capacity is intentionally constrained to keep costs down and to match capacity
to what is needed to meet demand goals.
EquaTerra in 2Q07 began polling its advisors on capacity for sales pursuits, transition
and delivery, and continues to poll service providers on overall capacity. Figures 21
through 23 illustrate combined capacity levels for pursuit and delivery and then
separately break out pursuit and delivery.
Advisors: SP Capacity
Overall
F ur 1
70%
60%
50%
40%
30%
20%
10%
0%
4Q05
1Q06
2Q06
3Q06
Constrained/Tightening
4Q06
1Q07
2Q07
Unchanged
3Q07
4Q07
1Q08
2Q08
Adequate/Increasing
Figure 21
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Advisors: SP Capacity,
Pursuiti
F ur 2
70%
60%
50%
40%
30%
20%
10%
0%
2Q07
3Q07
4Q07
Unchanged
1Q08
2Q08
Adequate/Increasing
Figure 22
Advisors: SP Capacity,
Deliveryo
i r 2
80%
70%
60%
50%
40%
30%
20%
10%
0%
2Q07
3Q07
4Q07
Unchanged
1Q08
2Q08
Adequate/Increasing
Figure 23
• EquaTerra advisors continued to see overall improvement, or at least less
deterioration, in service provider capacity. Those citing constrained/tightening
capacity fell for the fourth straight quarter to 24 percent (see Figure 21).
• Just 16 percent of advisors overall, however, cited service provider capacity as
adequate or increasing
• The situation in the market is better relative to capacity for sales pursuit and
deal structuring (see Figure 22). Here, advisors citing constrained capacity fell
to a survey low of 12 percent, while those citing adequate capacity rose to a
survey high of 28 percent. This number is still low, however, relative to what
would be ideal for both service providers and buyers.
• The more problematic area is capacity for deal transition and delivery (see
Figure 23). While constrained or tightening citation levels remained at survey
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low levels below 40 percent, less than five percent of advisors polled felt
service provider delivery capacity was adequate or increasing.
Digging into the reasons for positive and negative changes and market conditions
around service provider capacity, EquaTerra advisors offered the following points of
elaboration.
• Pursuit capacity
–– “General market demand for large comprehensive transactions (which
have long and highly engaged sales cycles requiring large pursuit teams) is
reducing, therefore releasing pursuit capacity.”
–– “Service providers are getting more aggressive in regard to sales. They’re
trying to be more creative to get the deal done.”
–– “Nearly all the providers are being selective regarding what they pursue.
This is due to both resource and pursuit funding allocations.”
–– “There is no clear trend as it varies from provider to provider.”
• Delivery capacity
–– “Providers continue to mightily struggle in transition. It appears to be an
endemic problem in the marketplace that the average transition person at
a provider organization does not really understand transition and therefore
manages the wrong issues and does an ineffective job of managing to a
schedule and budget, as well as containing the risk of an implementation.”
–– “After 10 years even the ‘Tier 1’ HRO service providers are still not ready
to deliver the same HR services on a global scale, which is what F500
companies expect. Even when the number of service languages is very
limited, they don’t have a model to support real global HRO. For global HRO
to become a long term business model, consolidation in the marketplace
must continue so that there will be maximum three global HRO players
(next to a large number of pure play HR outsourcers).”
–– “The big guys are constrained. The mid-market guys are fine.”
–– “Over the past two years the issues concerning experienced transition team
members has increased. One of the challenges for my clients once they
enter into the transition is the apparent lack of experience of the transition
leads and in many cases the broader team.”
Outsourcing service providers have typically been much more optimistic about their
own capacity. This is not surprising - but things have changed in the most recent
quarter:
• Forty-five percent of service providers polled indicated their collective capacity
was constrained or tightening (see Figure 24). This is the highest level recorded
over the life of the survey.
• Just 35 percent of service providers indicated capacity was adequate or
increasing. This is first quarter during which service provider citations of
constrained exceeded those of adequate.
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• There were no common attributes among the service providers that indicated
constrained or adequate capacity
SP Capacity
70%
60%
50%
40%
30%
20%
10%
0%
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
Unchanged
3Q07
4Q07
1Q08
2Q08
Adequate/Increasing
Figure 24
Capacity constraint is not a positive sign for the outsourcing market as it illustrates
service providers’ recurring challenges in being able to deliver what has been sold.
The longer this situation continues, the more buyer dissatisfaction will grow. It
is clear that just adding more bodies to transition and delivery efforts is not the
answer. Skills, based on experience, are more important than quantity. This situation
is also a sign that service providers, as well as buyers, need to focus more intently
on deploying and adopting more repeatable, standardized and component-based
service offerings. Gaining differentiation by standardizing on repeatable process
excellence is preferable to pursuing complex, one-off deliverables that fail to meet
expectations.
Update on Outsourcing Governance
EquaTerra continually probes its advisors and leading service providers on the
importance of outsourcing management and governance to the success of
outsourcing efforts, and to determine what is working and what is not relative to
governance. EquaTerra views quality outsourcing governance processes and models,
resources and supporting software tools as critical enablers to outsourcing success.
Our market research has consistently found a direct correlation between buyers’
governance capabilities and investments and outsourcing success and satisfaction
(see the EquaTerra Perspective paper, “Why and How Outsourcing Management
and Governance is Critical to Outsourcing Success”: http://www.equaterra.com/KR/
research/why-and-how-OM-and-Governance-is-Critical-to-Outsourcing-Success.
aspx, and the EquaTerra market study, “Outsourcing Management and Governance:
Building a Foundation for Outsourcing Success”: http://www.equaterra.com/KR/
research/omg-MO.aspx).
www.equaterra.com
EquaTerra this quarter polled both service providers and its advisors on the key
metrics buyers should use to measure outsourcing success. There was general
consensus on these metrics by both groups polled (see Figure 25):
• Service level agreement (SLA) levels and end-user satisfaction were the two top
metrics identified, both cited by 80 percent or more of advisors and service
providers
• Advisors placed slightly more emphasis on total service provider spend than did
service providers (66 percent compared to 47 percent) while service providers
placed more emphasis on executive or decision maker satisfaction (74 percent
compared to 58 percent)
• Several advisors also noted that consumption management (not included
in the survey list of metrics) is an important, but difficult to measure, metric
for buyers to employ. Buyers lacking good insights into consumption levels
run the risk, depending on the pricing model, of paying more than expected
for services when consumption levels exceed plan. If the outsourcing effort
enables a more accessible or higher level of service quality, this can drive up
consumption levels even more.
Key Metrics to Measure
Outsourcing Success
i
2 K M i to M
SLA levels
User satisfaction
Total service provider spend
Exec./decision
/
maker satisfaction
SP'ss
SP
Advisors
Invoice accuracy
Total outsourcing governance spend
Service level credit accuracy
0%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Figure 25
Advisors and service providers were also polled on how successful they felt buyers
typically are in performing various outsourcing governance activities, including
measuring some of the metrics identified above (see Figure 26):
• Service providers in general were more positive on buyers’ capabilities to
perform outsourcing governance tasks, ranking success rates higher than
advisors for all the tasks
• EquaTerra advisors indicated buyers have the most success with measuring SLA
levels (3.50 on a one-to-five scale where one represents not at all successful
and five represents very successful) and the least success with measuring
service level credit accuracy (3.00). Rankings overall were in a relatively narrow
range.
www.equaterra.com
• Service providers gave buyers the best marks in measuring user satisfaction
(3.89) and invoicing accuracy (3.86). As EquaTerra commonly sees invoicing
error rates in the five to 10 percent range, it is good to know service providers
are comfortable with buyers’ ability to identify these errors.
Neither advisors nor service providers scored buyers in excess of 4.0 on the oneto-five scale for Key Metrics to Measure, demonstrating buyers have room for
improvement in performing these activities. EquaTerra recently completed a market
study that digs deeper into outsourcing governance operational efficiency. The study
is available via this link: http://www.equaterra.com/KR/research/Effective-GovernanceYields-Outsourcing-Value-mo.aspx. As with developing solid outsourcing business
cases, buyer challenge with outsourcing governance are not new. The impact of
poor governance is heightened, however, as buyer outsourcing efforts become both
more global and more multi-sourcing in nature.
Buyer Success at Capturing
Key
Metrics
i
6Ͳ
y
SLA llevels
l
User satisfaction
Exec./decision maker satisfaction
SP'ss
SP
Advisors
Invoice accuracy
Total outsourcing governance spend
0.00
1.00
2.00
3.00
4.00
5.00
Figure 26
EquaTerra advisors offered the following additional comments on challenges buyers
have in managing their outsourcing initiatives, particularly as it relates to data and
metrics. These points serve as key indicators of what buyers should seek to avoid or
overcome in their outsourcing governance efforts.
• “Clients generally do a poor to mediocre job on figuring out costs, but they
do an even worse job on measuring the qualitative aspects (performance &
satisfaction levels). This is the key lesson for buyers.”
• “There are still a lot of HRO myths and wrong perceptions among potential
buyers. Generally the desired 20- 30 percent cost reduction is realistic, but
often doesn’t become real because of hidden costs buyers can’t capture
(business units protecting the data, huge M&A activities that have not yet been
integrated from a F&A perspective, etc.)”
• “Buyers are reluctant to reach into the organization for information concerning
the workforce being assessed. They have a difficult time estimating the
number of FTEs as well as the percentage of time an individual spends on inCopyright © EquaTerra 2008. All rights are reserved.
www.equaterra.com
scope activities, which leads to poor direct cost analyses. In addition, buyers
aren’t willing to include in the business case the cost avoidance or at least
the savings they will indirectly experience through the introduction of service
provider tools. This typically results in an extremely challenged business case.”
Service Provider Market Update
EquaTerra now offers another key research deliverable on ITO service provider
performance in several European markets. This deliverable was originally launched
by Morgan Chambers, which EquaTerra acquired 3Q07. These studies survey and
interview named buyers of specific provider services. They provide direct insights
into buyer opinions on service provider performance levels, and also assess and
interpret general outsourcing demand and activity trends in the markets covered.
More information about this report series is available via the country/region specific
sections of the EquaTerra/Morgan Chambers website (www.morganchambers.com/
UK/; www.morganchambers.com/NL/, etc.). Please contact research@equaterra.com
for additional details on this research offering.
Deal Snapshot
EquaTerra estimates approximately 150 outsourcing deals (ITO, general and
administrative BPO and customer care) with greater than $50 million in TCV were
announced in 2Q08. Average TCV for these deals was approximately $270 million.
This compares to approximately 120 deals with an average TCV of $250 million in
1Q08. Less than 20 of these 2Q08 deals were for BPO, with an average deal size of
under $150 million TCV. When estimating the number of new deals and average
TCV, it is important to recognize some deals are not publicly announced, or the deal
details are not provided. The ultimate TCV of a deal is also likely to change over the
life of the contract.
Following is a select list of some of the top deals announced in 2Q08.
Top Deals
• Perot Systems win estimated at $1 billion over 13 years with Harvard Pilgrim
Health Care. The contract enables Perot Systems to continue to manage
and support the client’s IT infrastructure, various business applications, and
administrative business operations.
• IBM win estimated at $300 million+ (€200 million) over 10 years with
ProSiebenSat.1 Group (a German broadcaster). IBM will manage ProSiebenSat.1
Produktion’s IT business applications, IT and media systems.
• EDS win estimated at $260 million over five years with Xerox. Various IT services
provided will include e-mail/mobile/collaboration, account administration,
software distribution, asset tracking, security services, service desk services and
mainframe hosting and operations management.
• Maximus win estimated at $400+ million, if all options are exercised, over a six
year term with the California Department of Health Care Services. Maximus will
provide call center, enrollment and processing-related services to members of
California’s Health Care Options (HCO) program.
www.equaterra.com
• CSC win estimated at $1.2 billion over seven years with Bombardier
Transportation. This is an extension of deal originally won in 2002. CSC will
deliver infrastructure outsourcing services including desktop, service desk,
network, and application management services for approximately 20,000
Bombardier employees across 33 countries.
• SAIC win estimated at up to $450 million over a period up to 5+ years if all
options are exercised with the U.S. General Services Administration. SAIC will
provide a variety of IT services to the U.S. Army’s Program Executive Office for
Enterprise Information Systems (PEO EIS). SAIC services will include program
management, software engineering and development, information assurance,
enterprise architecture, data warehousing, user support and analysis, and
implementation of emerging technology initiatives.
• Capita Group win estimated at $370 million (£190 million) over 10 years with
UK based Marsh Ltd. Capita will provide support and processing services to
enhance Marsh’s broking activities to clients across its multinational business.
Service Providers: Current Deal Portfolio Status
In the final section of the Pulse survey, EquaTerra asks service providers to profile the
state of their current deal portfolio from several dimensions:
• Re-competes/Renegotiations
• Cancellations/Non-renewals
• Problem Contracts
Service providers are typically positive in each of these three categories. While
troubled or failed outsourcing arrangements are typically well-publicized if the news
makes it to the marketplace, the reality is that most outsourcing deals face periodic,
and often ongoing, challenges which are ultimately resolved by the buyer and the
service provider.
There was little change in service provider expectations relative to re-competes and
renegotiations in 2Q08.
www.equaterra.com
SP re-competes and
renegotiations
F
27 e i P i
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
More Recompetes
Same Amount
Less Recompetes
Figure 27
Service providers remained positive relative to cancellation and renewal levels, as well
as problem contracts.
SP cancellations Fiand now-renewals
28
i
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
More Cancellations/NonͲRenewals
Same Amount
Less Cancellations/NonͲRenewals
Figure 28
Service providers also remained positive relative to problems contracts, especially
compared to trending in late 2006 and early 2007.
www.equaterra.com
SP problem contracts
Fi
2
70%
60%
50%
40%
30%
20%
10%
0%
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Up
Same
Down
Figure 29
Conclusion
Following are the key take-away findings from the 2Q08 Pulse survey results:
• BPO and ITO market demand growth slowed somewhat in 2Q08 according
EquaTerra advisors, and rose slightly according to service providers, compared
to 1Q08. Overall demand for the year still looks more positive than it was in
2006 or 2007.
• The HRO market continue to move more toward smaller, one or two process
deals and away from larger, multi-process and global HRO deals. This is as much
a result of lack of quality supply to deliver larger efforts as it is changing buyer
preferences.
• The recruitment process outsourcing (RPO) market continues to grow as a key
point solution in the HRO market segment
• Current economic uncertainty and decelerating economic growth in many
Western markets will impact non-outsourcing business and IT services demand
more than outsourcing demand. This uncertainty may, selectively, have a
negative impact on outsourcing deal flow in the short-term, but long-term it
will drive more outsourcing.
• Outsourcing has emerged as a key tool organizations are employing to take
advantage of opportunities and respond to challenges created by ongoing
globalization. While globalization creates positive opportunities for buyers
to enter new, fast growing markets and access skilled talent globally, it also
creates new competitive challenges and continues to negatively impact certain
classes of Western workers.
• Service provider capacity for deal pursuit is improving, though this is largely
a function of more selectivity and discretion by service providers around the
deals and clients they choose to pursue
www.equaterra.com
• Service provider capacity for deal transition and delivery remains constrained,
especially in BPO, with many service providers struggling to make this
fundamental capability work as well as needed
• Indian service providers continue to make inroads into multi-national accounts
and expand their offerings beyond application-related ITO; they are also more
positive on their ability to grow business in existing accounts (albeit often on a
smaller scale). Tier One multi-nationals will continue to compete better against
them than non-Indian Tier Two firms.
• The outsourcing market continues evolving to include more but smaller deals
spread across a greater number of service providers and delivered on a more
global basis
• Many buyers continue to struggle to define the metrics and capture the data
and information needed to construct quality and realistic business cases, and
subsequently struggle with managing their outsourcing efforts
www.equaterra.com
Appendix - Key Questions by Advisors’ Primary Geography and Outsourcing Focus Area
Question
Response
Demand
Up
38%
45%
40%
26%
63%
39%
41%
Flat
50%
40%
56%
53%
33%
52%
53%
Down
13%
15%
4%
21%
4%
9%
6%
SP capacity is constrained/tightening
12%
5%
10%
16%
33%
29%
20%
SP capacity is unchanged
60%
60%
62%
58%
39%
52%
67%
SP capacity is adequate/increasing
28%
30%
29%
26%
28%
19%
13%
SP capacity is constrained/tightening
37%
30%
35%
47%
45%
30%
29%
SP capacity is unchanged
60%
70%
65%
47%
45%
60%
64%
3%
5%
0%
5%
9%
10%
7%
Driving more outsourcing
51%
70%
52%
28%
50%
65%
54%
Slowing/rethinking outsourcing plans
28%
15%
22%
50%
10%
15%
15%
Little/no impact
21%
15%
26%
22%
40%
20%
31%
Access lower cost resources
38%
50%
43%
21%
36%
36%
53%
Access skilled resources
30%
30%
35%
26%
41%
23%
32%
6%
0%
0%
21%
9%
0%
11%
Decrease reliance local labor
27%
30%
17%
37%
45%
18%
16%
Improve efficiency/effectiveness
43%
35%
57%
37%
45%
36%
47%
Create var./flex. cost/op. model
54%
40%
61%
63%
55%
55%
63%
Focus more strategic activities
40%
50%
35%
37%
45%
55%
26%
Lower overall cost base
33%
30%
35%
37%
41%
32%
32%
Help IT investments
29%
30%
35%
21%
23%
41%
26%
Governance
User satisfaction
3.12
3.06
3.12
3.07
3.07
3.36
2.89
- Success Metrics
Exec/decision maker sat.
3.55
3.27
3.55
4.00
3.55
3.90
3.15
Total outsourcing gov. spend
3.00
3.00
3.00
3.13
3.13
3.29
2.75
Invoice accuracy
3.27
3.10
3.27
3.18
3.45
3.38
2.60
3.14
3.00
3.14
3.25
3.29
3.17
3.08
SLA levels
3.63
2.83
3.63
3.53
3.50
3.60
2.94
3.57
3.06
3.57
3.40
3.17
3.33
3.40
SP Capacity - Pursuit
SP Capacity - Delivery
SP capacity is adequate/increasing
Economy
Globalization
Springboard into new markets
Total
Global
Americas
EMEA
ITO
BPO
BPO & ITO
www.equaterra.com
About EquaTerra
Contact Us
EquaTerra sourcing advisors help clients achieve
sustainable value in their IT and business processes.
Our advisors average more than 20 years of
industry experience and have supported over 2000
transformation and outsourcing projects across more
than 60 countries. Supporting clients throughout the
Americas, Europe, Middle East, Africa and Asia Pacific,
we have deep functional knowledge in Finance and
Accounting, HR, IT, Procurement and other critical
business processes. EquaTerra helps clients achieve
significant cost savings and process improvement
with internal transformation, shared services and
outsourcing solutions.
If you would like to know more about EquaTerra please contact us.
Asia Pacific
+91 80 4022 4209
infoasia@equaterra.com
Americas
+1 713 470 9812
infoamericas@equaterra.com
Europe, Middle East, Africa
+44 (0) 845 838 7500
infoemea@equaterra.com
For more information on EquaTerra’s research efforts,
please contact Stan Lepeak at + 1 203 458 0677;
stan.lepeak@equaterra.com
www.equaterra.com
Copyright © EquaTerra 2008. All rights reserved. The prior written permission of EquaTerra is required to reproduce all or any part of this
document, in any form whether physical or electronic, for any purpose. 3092_072008.

EquaTerra Advisor and BPO/ITO Service Provider Pulse Survey

Transcription

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