European sector shines, while North American buyers show the least interest in BPO services. However, expect next year to bring more deals in reversal to the sluggish growth of ’06 and ’07.
For the past 12 consecutive quarters, EquaTerra’s Pulse Survey—conducted among its advisors and the leading ITO and BPO providers—has provided insight into outsourcing market demand as well as served as an accurate indicator of future demand. And based on our 3Q07 Pulse Survey, things may be looking up in the months ahead.
Demand level improved for both BPO and ITO in this quarter, according to 51 percent of EquaTerra advisors. That response is an increase of 21 percent over the previous quarter, but eight percentage points lower than in the third quarter of 2006. The average “up” rating for outsourcing demand during the life of the survey is 57 percent.
Eleven percent of advisors indicated that demand was down in 3Q07, the same level as last quarter. Overall, demand growth was stronger in ITO and in the Europe, Middle East, and Africa (EMEA). BPO demand levels improved in the quarter, as well.
FAO demand remained solid (and showed strength in Germany), and there are some indications of improvements in HRO demand. Americas-originated BPO, especially HRO, remained the slowest growing market segment. Offshoring usage has increased, and demand remains strong for global service delivery.
These findings illustrate that overall BPO and ITO demand is still growing, but at a slower pace than in previous years. Our analysis of the findings also points to 2008 demand shaping up to be more positive than in 2006 and 2007. This reflects an overall changing outsourcing market characterized by the following attributes:
- More experienced and sophisticated buyers who are increasingly deliberate in pursuing deals and also more skeptical about the viability of some of the loftier goals of process transformation;
- Increased usage of advisors by outsourcing buyers;
- Buyers who are more willing to undertake multi-provider deals across multiple towers and delivered from multiple global resource centers;
- Smaller deals with a shorter duration;
- Ongoing growth of multi-location global service delivery capabilities, a trend that has led to smaller deals, more incremental deployments, and the use of more and different service providers;
- A maturing service provider base; and
- Expansion and diversification of the service provider base, including both the ongoing growth of non-Western-based service providers and point-solution BPO service providers.
BPO and ITO service providers polled are somewhat more positive on new deal pipeline growth projections than in previous quarters. Those citing “up” pipelines came in at 37 percent, down one percentage point from last quarter, 11 percent year over year, and well below the survey average of 57 percent. Just five percent of service provider respondents indicated that pipeline growth was down for the quarter. In more detailed discussions with EquaTerra, service providers indicated they are more positive on pipeline growth than they were a year ago.
Service providers are not as optimistic as usual regarding future outsourcing demand growth. Just 39 percent of service providers polled expect demand to increase next quarter. This response level represents a drop of 23 percent from the prior quarter, is down 26 percent from the prior year, and is well below the survey average of 71 percent. Service providers do not expect demand to decline, however, and most (56 percent) expect demand next quarter to remain the same as the current quarter.
It is important to note that this question in EquaTerra’s Pulse Surveys is a measure of change in demand growth quarter over quarter, not absolute demand levels. Further, many service providers are chasing fewer deals to pursue stronger profitability, even though their pipeline is healthy.
Overall, EquaTerra projects that the rate of demand growth for both BPO and ITO will improve in 2008, with BPO demand continuing to rise more quickly than in the more mature ITO market. Based on these numbers, 2008 should outpace 2006 and 2007, but will probably trail the banner years of 2004 and 2005.
