Everest, the international research institute, has recently released its 2009 Q1 Market Vista report. This report gives an overview of the global sourcing industry and highlights in particular the transaction trends within the outsourcing world. sourcingfocus.com takes a closer look at the report’s findings and explores just where the outsourcing market is heading.

The first thing that the report summary states is that the volume of outsourcing transactions has decreased by seven percent when compared to Q4 2008. This can hardly come as a surprise as many organisations would have been reluctant to shell out the initial investment associated with new outsourcing deals, instead opting to review their internal strategies first.

Anand Ramesh, research director at the Everest Institute, commented on the dip in transactions, “There is a significant amount of caution about new spending or new initiatives. Organisations are in a wait and watch mode.”

The actual cash value of transactions also dropped by 16 percent. Does this clarify the theory that end users are taking a cost is king approach to outsourcing? Suppliers might be having to offer lower rates in order to entice new business. In turn, end users who are renewing their contracts will inevitably be looking for a reduction in price.

Martyn Hart, chairman of the National Outsourcing Association warns end users of the risks associated with excessive bartering, “The recession will prompt end users to pin suppliers to the ground on price, heavy bartering will be taking place at contract negotiation meetings across the world. However, suppliers will make up their money somehow, probably through pricey change requests and we may find end users regretting their initial price busting tactics.”

Mr Ramesh also pointed to the fact that organisations are taking a piecemeal approach to outsourcing, “Organisations are hesitant to sign long contracts. They are not putting their eggs in one basket and are [instead] engaging in smaller transactions for small ACV.”

As a result Mr Ramesh believes that multisourcing is increasing. Big transactions mean big upfront costs, something which no organisation is very keen on doing.

Despite a slump in transactions, the outsourcing industry is growing. The amount of transactions are up from Q1 in 2008 and all involved in the market can rest assured that there will be a continued upward trend. Mr Ramesh believes that by Q4 of 2009 the market will be significantly more positive.

One area of particular interest is the large amount of outsourcing activity within the Banking Financial Services and Insurance (BFSI) sector. Transactions within the BFSI sector have grown by 40 percent compared to Q4 2008, this indicates that an extensive review of resource allocation is taking place within the sector. All those involved in financial services outsourcing have certainly had to look at efficiency.

Large mergers and acquisitions within BFSI will mean a duplication of roles, higher overheads and costly IT infrastructure. It is therefore understandable that outsourcing within that industry has grown.

Within the BFSI sector, ITO was reported as being by far the largest growth area with a 38 percent increase in the number of ITO transactions. This has amounted to a massive 120 percent increase in ACV for ITO transactions in the BFSI space, bearing in mind, this is only an indication of deals for which contract value was disclosed. BPO however was reported as staying pretty much the same as the previous quarter.

2009 was supposed to be the year for BPO. Research from organisations such as the London School of Economics predicted BPO to be racing ahead, even overtaking ITO in speed of growth. Well if that is the case, then the Market vista report shows BPO as a late starter, because in Q1 of this year the value of BPO transactions was down by US$530 million. This did not surprise Ian McGowan, a Director at ADEC, a provider of BPO solutions, “Revenue losses in the banking sector last year and the Lehman Brothers collapse would have had a direct affect on BPO.”

While BPO appears to be stalling, the report points to an increase in captive investment, with areas such as the Philippines enjoying particular growth. “This is a clear indication of large global corporates investing in captives rather than third party suppliers. There is more risk involved, however results can be seen within 12 months”, commented Mr McGowen.

So, this report brings a mixed bag for the outsourcing community to digest. There are certainly no signs of a long term slowdown, however there appears to be significant changes in end user strategy. Suppliers will need to be wary of cost, which in this economy is a given. However, vendors will also need to be prepared to deal wtih smaller, quick turnaround contracts, rather than mega-deals. Captives look set to gain more traction in 2009 and locations such as the Vietnam and Turkey will also be looking ahead with great optimism.

The recession has not significantly slowed down the industry, it has just catalysed a change in strategy. All those involved in outsourcing should take note and prepare for a dynamic 2nd half of 2009.