The urgent need for cost savings is fueling demand for outsourcing, according to advisory firm, EquaTerra. In its Q109 Advisor and Business/IT Service Provider Pulse Survey, EquaTerra reports that 57 percent of the service providers polled, including the largest U.S. and Indian companies, have seen a 26 percent increase in their new deal pipeline for the first quarter.

While the deals were smaller in scope, mirroring a trend seen in other recent research reports, they grew in number as organisations decided cost-saving initiatives could no longer be postponed.

“We’ve been citing pent up demand for outsourcing in our past two quarterly Pulse surveys,” said Stan Lepeak, managing director of global research for EquaTerra. “These deals are beginning to flow as the need to control costs outweighs reluctance to initiate major change efforts like outsourcing in the midst of an economic crisis and regulatory uncertainty.”

Some of the key findings from the report include:

• Demand for business process/information technology outsourcing rose significantly in the first quarter with 49 percent of EquaTerra’s client-facing advisors citing increased demand (up 11 percent from last quarter) and 57 percent of the service providers polled reporting a surge in their new deal pipeline, a 26 percent improvement over Q408.

• Service providers (62 percent) expect demand to stay strong in the second quarter, up nine percent quarter-over-quarter and 14 percent year-over year.

• Over 75 percent of EquaTerra’s advisors reported buyers are currently focused on short-term (less than 12 months) cost- saving deals versus process improvement or access to external talent, and are pushing service providers to finance/defer/absorb any upfront change/transition costs.

The economic crisis is reshaping business operating models

EquaTerra sees indications the worldwide recession may trigger a fundamental shift in the way organisations do business in the next decade. The scope and severity of the economic downturn is forcing organisations to make deep workforce cuts and introduce radical changes to methods of service delivery. Economic survival/liquidity is driving most initiatives and EquaTerra advisors report some organisations have no choice but to essentially transform their operating model.

Additionally, instead of bringing work back onshore, experienced outsourcers are expanding initiatives and migrating/consolidating them with existing service providers to gain economies of scale, preferred pricing and better terms and conditions. Buyers entering the outsourcing market for the first time are focused on short-term deals with a clear return on investment. These buyers have a propensity to select A-list providers, indicating a desire to go with proven performance to ensure quality and enhance the chances of a successful outcome. Both categories of buyers are sharpening their negotiation tactics and keenly monitoring ROIs.

Overall, the economic crisis has prioritised outsourcing as a tool to achieve critical short- term cost reductions and drive significant, often overdue, overhauls to back-office service delivery models. “Ironically, despite populist backlash, the recession is likely to break through remaining resistance to outsourcing as business becomes more adept at using the tool to cut cost and improve efficiency,” said Lepeak.

sourcingfocus.com readers can obtain a copy of the Q109 Pulse survey by contacting Stan.Lepeak@equaterra.com