The economic downturn coupled with the “vast number of new providers” means that outsourcing is a buyers' market, while the provider landscape is moving towards companies finding their niche.

Speaking at the FT Outsourcing Conference in London this week, Elizabeth Buckley, director of Arete Research said “The entire market is driven by the clients. In the last downturn we saw the number of outsourcers increase; we saw many players enter the market. [Now] if you go back to what clients want, these large, mega outsourcing relationships... we are seeing fewer and fewer of those. For example, EDS and GM was broken up; ABN Amro are also doing the same, bringing in lots of new providers. Whenever project work came up during the contract the actual provider would be chosen from [a number of] incumbents.”

“Lots of new, niche providers mean that the balance of power is very much in the client's space. [Niche providers] need to differentiate themselves to win new business.”

Meanwhile, the large outsourcing providers are layering on new levels of business process outsourcing (BPO), she said, which she claimed remains an immature market outside of the CIO space.

“We've seen BPO become more mainstream and in horizontal areas such as HR,” she continued. “The big thrust now is very much toward vertical BPOs. If you look at horizontal BPOs, we're seeing a lot of the remote, offshore providers moving into horizontal areas – for example, TCS moving into HR globally with an SAP platform.”

Niche players have an advantage in the uncertain economy, said Bruce Keith, director growth capital at 3i plc – a view not shared by some other speakers at the conference, who saw the momentum coming from the big, established players. “The FD has taken more control of what's going on in businesses. I think [the economic downturn] will force FDs to consider whether captives should form part of the organisation. New people coming through will be the niche guys who will do something dfferent.”

This assumption of greater control by finance executives suggests that many clients are indeed are now feeling the economic pinch – for example, Vanco has recently lost its CEO to be temporarily replaced by the finance director (see News Analysis).

Keith said that in the current climate, fortune favours the brave – and the innovative mid-sized player: “A lot of the captives that have been built up in the past few years, have been because Bangalore is cheaper than Birmingham or Berlin. They have delivered on [service] being cheaper, but they haven't delivered on the next stage [innovation]. I don't think it will be the bigger players; it will be the medium players.”

Arete Research's Buckley added: “You can imagine the problems of retaining quality staff when working with only one client; that will be one of the big challenges for Indian captives. Clients want to see their own dedicated teams; so the real challenge [for outsourcers] is being able to leverage a platform across other clients to get the kind of profitability you expect.”

Asked about the next hot outsourcing destination – that interminable watercooler topic for the industry – both speakers felt that “geography” (location – why do analysts insist on using the wrong word?) is irrelevant. “It's about a global delivery mindset; you should be able to attract the best talent so that clients in New York, the Cayman Islands or London can have a 24/7 service,” said Keith, reeling off a choice selection of some of the wealthiest regions on earth as though low-cost destinations were, indeed, an irrelevance.

Arete's Buckley was more on the money, topic-wise at least: “Regional players who lack differentiation are going to be in trouble. The challenge for Indian SIs, for example, will be having centres in Brazil or eastern Europe."

Questioned about the consumer backlash against offshore call centres – as highlighted in sourcingfocus.com's exclusive research last week – 3i's Bruce had a solution for a US that believes it is haemorrhaging jobs overseas: “The Dollar is now so weak there is an opportunity for voice-based services [in the US].”