Outsourcing and the Economic Crisis: Crunch Sourcing
The world is now deep enough into the current recession that it’s possible to draw some clear conclusions as to how the global outsourcing market is being affected. What do the signposts show? Outsourcing may not have been the recession-busting marvel that many industry experts predicted; but outsourcing customers (and even some outsourcing service providers) are in better position to come out of the recession than they might have expected.

In fact, the story over the past 12 months has been one of steady, but not spectacular, growth. The International Association of Outsourcing Professionals (IAOP), a leading industry association, conducted a survey of their members and found that:

  • 75% of organizations planned to continue with their outsourcing plans, or to increase outsourcing in response to the recession
  • 19% of organizations have re-negotiated the prices and terms of their existing outsourcing contracts; and
  • 25% of organizations report lower volumes on their existing contracts.

So, while the volume of deals in 2009 so far has dipped since 2008, this ought to be seen as merely a return to normal levels of activity from a peak in early 2008. In all likelihood, 2009 will resemble the second half of 2008, not the first half.

The focus of outsourcing activity at the moment seems to be on quality, flexibility, and saving. Interestingly, in the same IAOP survey cited above, more companies have identified their key goal as attaining greater contract flexibility from their outsourcing relationships rather than simply achieving greater up-front or overall savings.

Overall, the real story of outsourcing at the moment seems to be the continued emphasis on small deals and, in particular, companies focusing on “housekeeping” i.e., cleaning up their managed services relationships; restructuring; realignment; and renewal.

The reason for the underlying trend in favor of smaller deals is that companies are focusing more on tactical initiatives designed to achieve specific goals, rather than larger, “bet the company” projects.  This also tends to deliver a different type of deal.  Deal structures are changing in the following ways:

  • deals driven by cost savings look different from those done in better economic times by emphasizing reduction in head-count and de-emphasizing savings from a reduction in capital investments;
  • deal terms are getting shorter to allow both customers and service providers to restructure more frequently to account for shifting market conditions;
  • there is an emphasis on the already well-established underlying trend towards multi-sourcing;
  • there is an openness to alternative service delivery models (and hence the rise of cloud computing as a popular topic)