EquaTerra’s second-quarter survey confirms what many in the industry already know: the market has reached a plateau and is headed for slower growth.
Change in demand growth for BPO and ITO dropped again in 2Q07, according to EquaTerra advisors polled in its most recent quarterly Pulse Survey. The data clearly confirmed continued weakness in the HRO market and indicated that the expansion of the segment has reached a plateau.
Only 30 percent of advisors indicated that demand levels were up for the quarter, down 25 percent year over year and the lowest level in the 11 quarters in which the Pulse Survey has been conducted. Comparatively, the average “up” rating for outsourcing demand over the life of the survey is 57 percent. Of the advisors, 11 percent indicated that demand was down. In terms of geographic variation, EquaTerra is seeing stronger outsourcing demand growth in Europe than in North America.
These findings illustrate that overall BPO and ITO demand is still growing, but at a slower pace than in previous years, and the findings point to a slower market growth rate for the remainder of 2007. This reflects a changing outsourcing market characterized by the following attributes:
• Smaller deals with shorter duration;
• Greater use of multi-provider outsourcing;
• Ongoing growth of multi-location global service delivery capabilities, a trend that can lead to smaller deals, more incremental deployments, and the use of more and different service providers;
• 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;
• More experienced and sophisticated buyers who are deliberate in pursuing deals and skeptical about the viability of some of the lofty goals of process transformation. At the same time, these buyers are more willing to undertake multi-provider deals across multiple towers and delivered from multiple global resource centers.
In general, these are characteristics of a more mature, diverse, and sophisticated outsourcing market. So while market growth is not as fast or strong as some feel (or hope) it should be, this is not a negative reflection on the market or on the concept and value proposition of outsourcing. While buyers often experience challenges and problems with their outsourcing efforts, overall results have been positive and beneficial. Outsourcing has become a commonplace tool buyers employ.
Overall, demand growth will remain positive but modest for the balance of 2007, similar to 2006 levels and down from 2004 and 2005. It is also important to note that EquaTerra estimates pipeline growth is stronger among smaller and more specialized service providers (which are not polled in the Pulse Survey) and typically not in deals utilizing sourcing advisors.
It is important that current and prospective outsourcing buyers understand market demand trending because it is indicative of several conditions. These include the success buyers achieve with outsourcing (i.e., more success, more demand—word gets around fast); provider capacity (i.e., more demand constrains capacity volume and quality); and provider diversity and depth (i.e., more demand brings more outsourcers to a market segment, though it can take time to gain adequate skills and experience). Buyers ultimately must decide, however, whether outsourcing is right for them and their specific situations. They must determine which functions are suitable for outsourcing and develop a strategy, business case, and approach that fit their unique needs. And they must also identify key challenges their peers have faced in their outsourcing efforts and learn how to avoid or overcome those challenges.
In the 2Q07 Pulse Survey, EquaTerra advisors were asked to assess whether buyers (i.e., their clients) were more positive or negative on the outsourcing concept than they were a year ago. Responses were mixed, but the majority of advisors felt buyers were more positive, as well as more realistic and sophisticated relative to outsourcing, especially regarding outsourcing’s ability to deliver innovation and process transformation.
Outsourcing market demand in North America continues to slip, although growth still remains positive. Deal size and scope also continue to decline. Service provider capacity remains tight.
Bottom line? Outsourcer capacity constraints in BPO, transition challenges, and buyer cautiousness point to a slow second half of 2007.