Report: Demand for HR, IT and F&A Outsourcing Slowing

While demand for outsourced services continues to grow, it is showing signs of a slowdown, according to London, U.K.-based EquaTerra, a multi-national sourcing advisory firm. In its third-quarter “Outsourcing Pulse Survey”, the firm found 16 percent of service providers reported a decline in its demand pipeline, the first negative report of the year.  Furthermore, only 68 percent of providers reported that their pipeline was up in the quarter compared with the year before.

The quarterly surveys query those on the “front lines” of the information technology outsourcing (ITO) and business process outsourcing (BPO) industries to gain in-the-field insights into sector trends and projections. The Outsourcing Pulse Surveys are conducted among 24 leading service providers and focus on outsourcing trends in HR, IT, call center/customer care/CRM, finance/accounting/administration, and procurement processes. The surveys cover a variety of other topics including outsourcing sales cycles, demand breakdown by process and sub-process, horizontal and vertical industry trends, and other critical measurements.

“The survey found demand for outsourcing active during the third quarter of 2005, but indicators point to a slow down in growth,” said Stan Lepeak, EquaTerra’s managing director. “Weakening pipelines are a result of both lower buyer demand, more selective sourcing practices (i.e., buyers taking longer to pull the trigger) and potentially cyclical variations related to slower summer months, though lower forward expectations would indicate issues beyond cyclical variations and perhaps a limit to the growth trajectory.”

The third quarter results trailed estimates slightly, similar to the previous quarter, representative of typical service provider optimism on future performance. Finance and accounting was the strongest BPO/ITO market segment in the third quarter, more than doubling from the prior quarter to 68% from 26%. Human resources BPO remained steady at 42%, down one point from the second quarter. Information technology outsourcing and call center/CRM BPO both also strengthened. The jump in finance and accounting (F&A) outsourcing demand is in part a function of market demand as well as the mix of service providers responding to the survey who were more active in the F&A outsourcing space .

Within the HRO, payroll and benefits administration remained the two strongest functional areas, cited equally by nearly 90% of service providers responding. HRIT continued to increase, and compensation outsourcing demand more than doubled from the previous quarter. The overall rankings for the top three areas were consistent in the second quarter compared with the first quarter. The more strategic areas of HR, recruiting, and learning & training, slipped back significantly in demand from prior quarterly results. The decline was evident across all service providers polled. We view this as more an aberration than trend.

Within the finance and accounting outsourcing (FAO) process area, demand in functional areas tracked similar to the prior quarter. Accounts payable was the leader, identified as one of the top three areas by more than 90 percent of respondents. AR/credit & collections was second at 80 percent, followed by general accounting at 60 percent. The more strategic area of finance, control and risk management fell back to below 10 percent from an unusually high level of 38 percent in the second quarter.

Demand growth for multi-shore or “offshore” resources increased slightly in the third quarter compared; 56 percent of service providers felt multi-shore growth was up quarter over quarter, compared with 48 percent in 2Q. Nearly half, 44 percent, cited flat, multi-shore levels, while no service providers cited a decline.

Tags: Consultants & Advisors, HRO Today Global, Professional Contribution

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