Sluggish demand for new scope projects, continued emphasis on cost reduction , large contract restructurings, and a wobbly macroeconomic situation in Europe are impeding full recovery of the outsourcing market. But cloud based services, a promising mid-market, and healthcare

1. Outlook 2010: Slow Start,
Great Prospects
Sluggish demand for new scope projects, continued emphasis on cost reduction , large contract
restructurings, and a wobbly macroeconomic situation in Europe are impeding full recovery of
the outsourcing market. But cloud-based services, a promising mid-market, and healthcare
by Ed Nair
T He first quarter of 2010 indicated a 25 per-
cent growth in total contract value compared
to the same quarter last year. According to
1Q10 Global TPI Index, which measures commercial
outsourcing contracts valued at $25 m and more,
al value of about $12 B are due to expire in 2010.
These contracts would get restructured in 2010.
When contracts come up for restructuring, com-
panies look at breaking up the scope to include a
few new vendors. Many of the Indian vendors are
the total value of such contracts stood at $19.5 B. reaping benefits here because when these contracts
The story behind the quarter performance is inter- were signed, typically five to seven years back, the
esting: 42 percent of the contracts were renewals of global outsourcing vendors like IBM and Accenture
contracts that got expired or came up measured up better in terms of
for renegotiation. This is an unusually capabilities. Over time, the In-
high number according to TPI experts. On the BPO front, dian vendors have matured both
Said Mark Mayo, Partner & President, in capabilities and in scale and
TPI, “The previous record for this was companies have are competitive in pricing. This
29% and it happened way back in 2006. explains the anomaly between
We didn’t expect this number to be so changed tracks and the recent quarter performance
high for 1Q2010.” One reason for this of large global vendors and the
is that many of these were contracts instead of going for India-based vendors. IBM and Ac-
that were supposed to be signed in centure reported sluggish results
the previous quarter, but were pushed large multi-tower whereas TCS, Infosys, and Cogni-
out into this one. Consequently, ‘new
scope’ contracts fell by 15 percent.
deals, they are zant amongst others had far bet-
ter performance and outlook.
looking for well- Companies have not exactly
First Quarter and Beyond started opening their purses wide
Delving deeper into the quarter’s per- defined projects and cost reduction continues to
formance, it bears out that ITO domi- be the dominant agenda in 2010.
nated the story: application develop- that are smaller in This works well in generating de-
ment and maintenance (ADM) and mand for cheaper India-based ap-
ADM combined with infrastructure scope and shorter in plication outsourcing companies.
services contributed the major share to On the BPO front, companies have
the total contract value. In fact, three duration changed tracks and instead of go-
out of the four megadeals (deals over ing for large multi-tower deals,
100M) were ITO. For the Americas, the quarter was they are looking for well-defined projects that are
a coup with 47 percent of the deals, which made smaller in scope and shorter in duration. Says Mark,
it the best quarter since 2006. That said, it was the “Companies are taking a step back and rethinking
manufacturing, travel, transportation and hospital- the way BPO work is handled. Instead of going to
ity verticals that lifted up the performance, unlike one major player they are looking for a small group
usual suspects like financial services and telecom. of preferred suppliers. This is very much unlike
The rest of 2010 has got quite a few contracts when companies signed up large multi-tower BPO
that would come up for renewal but Mark does deals.” Overall, BPO remained slow as clients post-
not expect the proportion to be as high as in this poned transformational deals.
quarter. Mark estimates that contracts with annu- europe, led by UK, has been an important mar-
10 GlobalServices www. globalservicesmedia.com GS100-2010

2. Special Report
ket for outsourcing services. While the action is be the most active
shifting away from UK to continental europe, re- 4 Main drivers are cost reduction, desire to global-
cent reports suggest that in the short term europe ize business operations and to transform / re-en-
would dampen the overall outlook for the industry. gineer business processes
Companies like Cognizant and Tech Mahindra have 4 Inhibitors are other priorities brought on by the
already reported weakness in europe in the current economic crisis and internal politics / resistance
quarter. Recent incidents like the bailout of Greece, to change
risks associated with other european economies, 4 Customer-willingness to evaluate cloud-based
and other macroeconomic factors pose an addition- “business utility” offerings is strong as they in-
al risk to companies (like Accenture, Infosys, CSC, creasingly look at hybrid IT/BPO solutions
etc.) who have a substantial footprint in europe. 4 Strong signs of increased adoption of industry-
Overall, the recovery of the outsourcing market specific BPO solutions, most notably in the Fi-
is slow. Mark says,”It is going to continue to come- nancial Services and Life Sciences sectors
back slowly, in fits and starts, a bit of ITO here, a bit Going forward, one would expect to see large
of BPO there. Definitely, it is not a year of bounc- deals being broken down into deals of smaller
ing back.” scopes. This would directly affect the large vendors
like IBM and Accenture but their losses would be
Opportunities gained over by some of the larger Indian vendors.
In a survey conducted jointly by Global Services, The impact of cloud computing and cloud-based
Horses for Sources, and SSOn, in January 2010 re- services is an essential conversation these days
garding the outlook of the industry, the key points in every IT deal and in some BPO deals. It would
that emerged were: translate into real market opportunities during the
4 Key areas of increased outsourcing scope are rest of the year.
expected to be in areas with heavy low-cost la- This year should be remembered more for
bor arbitrage support (nearshore and offshore) Obama’s historic healthcare bill and less for BP’s oil
–software applications, call center, engineering spill. The former holds great opportunity both for
management, finance & accounting, analytics IT as well as BPO for many years to come and 2010
and human resources would be the year when vendors would start attack-
4 The middle-market ($750m-$3000m)is poised to ing the tip of the healthcare iceberg. GS
GS100-2010 www. globalservicesmedia.com GlobalServices 11