EquaTerra Whitepaper 3Q09 Pulse Report Oct2009 3123

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Copyright EquaTerra 2009. All rights are reserved. EquaTerra Advisor and Service Provider Pulse Survey Results - 3Q09 - Page 1

EquaTerra Advisor and Service Provider Pulse

Survey Results 3Q09

Introduction

EquaTerra is pleased to release the ndings from its 3Q09

EquaTerra advisor and business and information technology

(IT) service provider Pulse surveys. Through these surveys,

EquaTerra has developed a highly informative gauge that

provides quarterly insights into trends and projections in the

outsourcing and third-party business and IT service markets,

gleaned from its own eld advisors and leading global service

providers. EquaTerras advisors are the leading experts on

business and IT services, assisting buying organizations

actively exploring or undertaking shared services, outsourcing,

offshore and other service delivery alternatives.

Since their inception in 2004, the EquaTerra advisor and

service provider Pulse surveys have yielded insightful analysis

of current and ongoing market trends. They capture changesin demand, scope, capacity and related key market indicators.

They highlight the changes, and the direction of change, in

the business and IT service industry as a whole. The surveys

focus on where the market is going and how that direction is

changing or not compared to prior quarters and years.

EquaTerra also incorporates key quantitative market data and

leading indicators from sources outside the Pulse surveys.

These sources include experiences from direct client advisory

engagements and other EquaTerra market research, as well as

service provider performance and satisfaction studies.

This edition of the advisor and service provider Pulse surveys

reects business and IT service market activity during 3Q09

(July through September 2009) and projections for the

balance of 2009 and into 2010. Topics explored include:

Demand and buying patterns, including the impact of

market conditions on the demand for outsourcing and

related third-party business and IT services

Deeper dive analysis of buying patterns and trends in

procurement outsourcing and IT outsourcing (ITO)

The impact of current market conditions on buyer

sourcing investment strategies and common buyer

activities undertaken in response to market conditions

Outsourcing deal scope, sales cycles, pricing, contract

value and protability

Service provider pursuit and delivery capacity

The Pulse surveys focus on using outsourcing and other third-

party services to support the following functional areas:

Customer care/call center

Finance and accounting (F&A)

Human resources (HR)

Information technology

Knowledge process outsourcing

Procurement

Vertical industry business services

The following leading global business and IT service providers

were polled for this quarters sell-side survey:

Accenture

ACS

Caliber Point

Capgemini

Ceridian

Cognizant

Convergys

CSC

Genpact

HCL Technologies

Hewlett-Packard

IBM

Mercer

Northgate Arinso

Outsource Partners Intl

Steria

TCS

Wipro

WNS


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Business process outsourcing (BPO) and ITO market

demand growth remained steady in 3Q09 according

to EquaTerra advisors and third-party business and IT

service providers polled. Providers were more bullish on

growth than advisors, but both groups cited growing

market strength. Most of the pent-up buyer demand

accrued at the end of 2008 and start of 2009 has made

it into the market, but uncertain market conditions and

turmoil within individual buyer accounts continue to slow

some sourcing efforts.

Buyer sourcing strategies still primarily are focused on

cost cutting and avoidance of future investments. Ifanything, they are becoming more defensive as opposed

to shifting usage to third-party services as a means to

prepare for an economic upturn. While defensiveness

is understandable in current market conditions, buyers

must start to shift sourcing strategies in a direction that

supports a more growth oriented business environment.

The market for more discretionary third-party services,

such as consulting, systems integration and some

application development work, remains weaker than for

outsourcing, though there are signs of improvement indemand for application development services. Public

sector and military/aerospace markets remain a strong

exception where demand for all types of third-party

business, mission support and IT services remains strong.

There are a variety of activities buyers are more

aggressively undertaking in light of current economic

conditions, including opening deals back up to negotiate

better pricing and service levels, as well as doing more

benchmarking and baselining of new deals. Overall,

though, the pursuit of these and related activities varies

across accounts and situations and is far f rom universal

in uptake.

Buyers are assessing newer, or newly packaged, delivery

models like software as a service (SaaS) and remote

infrastructure management (RIM) on their potential

to complement, extend, or in some cases supplanttraditional outsourcing efforts. SaaS will have greater

impact on the market, more so as a substitute for

buying software than on outsourcing. RIM, while having

interesting attributes, will prove primarily an extension to

existing IT infrastructure outsourcing models.

Service provider capacity overall remains tight for

both deal pursuit and delivery, but conditions did not

change signicantly in the quarter. Service provider

selectiveness is helping to improve capacity. Budget and

skill constraints and the need to chase and deliver moresmaller deals, exacerbates capacity constraints, as do ts

and starts in buyer sourcing efforts.

Growth in pricing pressure on serv ice providers

continued to ease compared to earlier in the year.

Pricing pressure levels overall remain high as buyers seek

lower cost deals occasionally at the expense of quality.

EquaTerra offers the following conclusions from the 3Q09 Pulse survey:

Distribution of the EquaTerra Pulse survey reports, controlled by EquaTerra, is intended for internal use and select delivery to

EquaTerra clients, prospects and other marketplace representatives. Questions or comments regarding these surveys should be

directed to Stan Lepeak, Managing Director of EquaTerra and EquaSiis Global Research, +1 203 458 0677 or

[email protected].


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Table of Contents

IntroductionI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

EquaTerra Advisor HighlightsII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4BPO/ITO Service Provider HighlightsIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Market Demand and Market Trends UpdateIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Advisors: Market DemandFigure 1 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Advisors: Demand by Service Delivery ModelFigure 2 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Advisors: Change in Demand by Service Delivery ModelFigure 3 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Service Providers: New Deal Pipeline ProjectionsFigure 4 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Service Providers: Demand Next QuarterFigure 5 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Weighted Aggregate Market Demand: Advisors & Service ProvidersFigure 6 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Economys Impact on Outsourcing DemandV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Economic Environments Impact on OutsourcingFigure 7 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Market Conditions: Impact on Buyers Sourcing Investment Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Changes to Buyers Sourcing Investment StrategiesFigure 8 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Demand Trends by Functional AreaVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Advisors: Demand by Functional AreaFigure 9 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Service Providers: Demand by Functional AreaFigure 10 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Advisors: Functional and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Service Providers: Functional and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Demand Trends by Functional Area: Deeper DiveVII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Procurement Outsourcing: Key Success Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Key Procurement Outsourcing Success FactorsFigure 11 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

ITO Trending: Application Development and Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17ITO Trends: ADMFigure 12 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

ITO Trending: Software as a Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18ITO Trends: SaaSFigure 13 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

ITO Trending: Remote Infrastructure Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19ITO Trends: RIMFigure 14 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Demand Trends by IndustryVIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20Advisors: Demand by IndustryFigure 15 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Service Providers: Demand by IndustryFigure 16 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Sales CycleIX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Service Providers: Sales CycleFigure 17 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Pricing CompetitivenessX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23Service Providers: PricingFigure 18 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Deal ScopeXI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24Service Providers: ScopeFigure 19 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Service Providers: Contract Proftability and Ability to Increase ScopeXII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Service Providers: Contract ProtabilityFigure 20 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Service Providers: Ability on Increase ScopeFigure 21 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Service Provider CapacityXIII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Advisors: Service Provider Capacity, OverallFigure 22 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Advisors: Service Provider Capacity, PursuitFigure 23 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Advisors: Service Provider Capacity, DeliveryFigure 24 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Service Provider CapacityFigure 25 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Common Buyer Responses to Current Market ConditionsXIV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Common Buyer Responses to Current Market Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Common Buyer Responses to Current Market ConditionsFigure 26 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Service Provider Market UpdateXV. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Deal Snapshot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Select Top Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Service Providers: Current Deal Portfolio StatusXVI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34Service Provider Re-competes and RenegotiationsFigure 27 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Service Provider Cancellations and Non-renewalsFigure 28 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34Service Provider Problem ContractsFigure 29 - . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

ConclusionXVII. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Appendix - Key Questions by Advisors Primary Geography and Outsourcing Focus AreaXVIII. . . . . . . . . . . . . . . . . . . . . . . . . . .37

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Market Demand and Market Trends Update

Change in demand growth for BPO and ITO, as well as other business processes and

IT services, held steady in the third quarter of 2009 according to EquaTerra advisors

polled (see Figure 1)*.

Forty-eight percent of advisors indicated that overall third-party business and

IT service demand levels were up in the quarter, two percent from 2Q09 and

ve percent from 3Q08 levels. This level is below the average 53 percent up

rating over the life of the survey.

Just ve percent of advisors indicated demand levels had declined in the

quarter, in line with the survey average, down two percent from last quarter.

Demand levels were similar across geographies and functional areas, with

advisors that support BPO deals somewhat more positive on overall demandgrowth than those that support ITO efforts. Please see the appendix for a

complete breakdown of response levels by geography and type of service work

supported.

1Advisors: Market Demand

0%

10%

20%

30%40%

50%

60%

70%

80%

90%

100%

4Q04

1Q05

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1Q09

2Q09

3Q09

Down Flat Up Aggregate

Figure 1

EquaTerra advisors were polled on demand levels across the different categories of

business and IT services. These categories are BPO, ITO, other types of third-party

IT services (e.g., consulting, systems integration, project-based work) and internalprocess improvement efforts (i.e., deploying expanded shared service of offshore

captive operations). Figure 2 shows the areas of greatest demand. Figure 3 illustrates

the relative change in demand for these service delivery models compared to the

prior quarter.

1 *The aggregate market demand and pipeline levels illustrated in Figures 1-3 are based on a

calculation of the down, at and up responses to each question, and depict a combined or

aggregate total of each quarters response levels.


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ITO was the strongest area of demand across the four service delivery

categories cited by 65 percent of advisors (Figure 2), down two percent from

last quarter, followed by BPO at 18 percent, unchanged from last quarter.

Sixty-one percent of advisors indicated that demand for ITO grew quarter over

quarter (Figure 3). Fifty-n ine percent of advisors indicated that demand for

internal transformation efforts like shared services grew in the quarter.

Twenty-seven percent of advisors cited an increase in demand for non-ITO

third-party IT ser vices, an increase of eight percent from last quarter. This

appears an early indicator that demand for these more discretionary services is

reviving after several weak quarters.

Advisors: Demand by Service Delivery Model

3%

3%

14%

18%

65%

Other

Other IT Svcs

Internal Imp.

BPO

ITO

Figure 2

Advisors: Change in Demand by Service Delivery Model

%%

%

5 %

%

%

% % % %

BPO ITO Other IT Svcs Internal Imp.

Down

Flat

Up

Figure 3


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The ongoing strong demand for internal transformation efforts highlights that

organizations today more often are addressing problems themselves in addition

to bringing in external resources. Typically, this approach is more common inorganizations less prone to outsourcing, such as those in the public sector. This

trend will increase in the public sector given a combination of great need for change

and less viability of using outsourcing as a change and improvement tool. Buyers

also undertake internal process work to prepare processes for outsourcing prior to

transitioning them to providers (e.g., improve/transform and then outsource).

The acute need to reduce costs and overhaul operating models will continue driving

more outsourcing deal ow into the market. Demand for other t ypes of third-party

services, like unbundled consulting and more discretionary application development

work, will remain weak throughout 2009. Protectionist trade policies, anti-

outsourcing rhetoric and anti-globalization efforts will continue to grow in western

markets but will have limited impact on overall outsourcing levels, though some

measures will complicate some buyers sourcing agendas.

Service providers polled continued to become more enthusiastic regarding new deal

pipeline growth projections (see Figure 4).

Seventy-ve percent of service providers polled cited pipeline growth in the

quarter, up 10 percent quarter over quarter and 34 percent year over year.

These are the highest levels recorded since the second quarter of 2005.

No service providers cited a decline in pipeline growth.

Service Providers: New Deal Pipeline Projections

0%

10%

20%

30%

40%

50%

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100%

1Q05

2Q05

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2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

Down Q/Q About the same Up Q/Q Aggregate

Figure 4

While all service providers polled were positive relative to pipeline growth, larger

multinational service providers were the most enthusiastic.

Service providers remained optimistic about future outsourcing demand growth (see

Figure 5).

Sixty-eight percent of service providers polled expect an increase in demand

next quarter, up ve percent from last quarter and 29 percent from 3Q08.


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No service providers expected demand levels to decline next quarter.

Please note this question is a measure of change in demand growth quarter over

quarter not absolute demand levels.

Service Providers: Demand Next Quarter

0%

10%

20%

30%

40%

50%

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1Q05

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2Q08

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4Q08

1Q09

2Q09

3Q09

Decrease Flat Increase Aggregate

Figure 5

The nal chart in this section (see Figure 6) highlights general demand trending

over the past 19 quarters. The weighted average is based on response levels from

both advisors and service providers for each quarter. Any aggregate totals above

the line indicate overall market growth, while totals below the line indicate market

contraction. The gap between service providers and advisors grew for the third

straight quarter. This is in part a function of advisors providing more of a forward

indicator than providers as well as growth in current account expansion by providers

and in non-advisor deals

Weighted Aggregate Market Demand: Advisors & Service Providers

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

Advisors Service Providers

t o t

t nt ct

Figure 6


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Economys Impact on Outsourcing Demand

The global economic recession seems to have bottomed out in late 2Q09 and

was recently ofcially announced as over in the United States. Great variations in

economic stabilities still exist, however, across geographies, industries and individual

organizations. There is also much debate about whether the recovery will show a

V or L shape (i.e., rebound strongly or result in slow growth for the foreseeable

future). Regardless, economic conditions continue to heavily impact buyer usage and

preferences for third-party services and the manner in which they consume these

services.

EquaTerra has polled advisors and service providers over the past seven quarters as

to how current economic conditions are impacting outsourcing demand levels (see

Figure 7).

The combined response levels for advisors and service providers show that 53

percent felt market conditions are driving more outsourcing. This level was

down ve percent from last quarter. Advisors and service providers were in

sync on this response.

Forty-three percent overall indicated economic conditions are causing buyers

to slow or rethink outsourcing decisions, up four percent from last quarter.

Buyers more often are deferring, not canceling, outsourcing initiatives.

The deferrals typically are caused by other events occurring in the buyer

organizations that have impacted the sourcing process, rather than by buyers

changing their minds about outsourcing.

There were no major variations in responses from advisors based on geography

or functional area of outsourcing supported.

Economic Environment s Impact on Outsourcing

% 5 % % % %

%

%

%

5 % %% 4 %

%% %

% % 4%

1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09

Driving more outsourcing Slowing/rethinking outsourcing plans Little/no impact

Figure 7

Advisors offered the following additional comments on how the current economy is

impacting outsourcing and third-party service usage.


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Buyers have always required the need to reduce costs. Outsourcing is a

tool to enable them to get there. It might have some more visibility with

some rms that were against it and see no other options but not to theextent that the downturn has driven a huge amount of inuence, just more

awareness of the opportunity.

Emphasis is cost reduction as organizations are becoming truly critical in

assessing what is or is not value add in the business. Speed to benet is

more important now as well, so objectives/strategies are less ambitious.

Clients taking a phased approach.

The volume is increasing but buyers are rushing the process taking

shortcuts which will most likely lead to lower realized savings and deals that

may require renegotiation in the future.

There is a feeling the downturn is over and now is time for taking action.

Service providers added these comments on how the economy is impacting market

demand.

As the economy struggles, cost leadership and risk management are

becoming more of an issue in the global scenario, pushing the clients

from end-to-end outsourcing to tactical single process outsourcing. The

necessary requirement is the presence of a strong business case.

The economic downturn is making outsourcing more palatable to a

broader set of clients. Clients are focused on optimizing their operations

and containing costs, and see BPO as a potential lever. Offshoring, inparticular, is resonating with clients who seek short-term cost reductions

with limited upfront investment. However, clients are also delaying decision-

making resulting in longer, more drawn out sales engagements and

contract negotiations.

Market Conditions: Impact on Buyers Sourcing Investment Strategies

EquaTerra continues to see buyers use troubled times as a motivator to pursue

aggressive change efforts they were too timid or distracted to undertake when

times were good. They have a strong desire to make the deep cuts and major

changes to service delivery models required to fundamentally change operating

models to better compete with more aggressive global competition.

EquaTerra added a new question for both service providers and its advisors in this

quarters Pulse survey to ascertain if buyers strategic approaches to outsourcing are

shifting back toward supporting growth or are still largely focused on reducing costs

or deferring investments (see Figure 8).

Just 10 percent of EquaTerra advisors polled indicated that buyers sourcing

plans, investments and strategies have begun to focus more on supporting

growth in anticipation of an economic upturn.


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Two-thirds of advisors indicated that buyer sourcing strategies have not

materially changed over the past several quarters and are still driven by

defensive moves to reduce costs and avoid new investments. Twenty-threepercent of advisors felt that buyers have become even more defensive over the

past few quarters.

Advisors in the Americas were least likely to feel that buyers sourcing strategies

reected preparation for better economic times. Advisors that primarily

support BPO effor ts were more likely to take this view than those supporting

ITO.

Service provider response levels were nearly identical to overall EquaTerra

advisor responses

Changes to Buyers Sourcing Investment Strategies

0%% Preparing for an economic upturn

No material change; defensive/cost

cutting focused

Even more defensive

Figure 8

Despite improvements in stock market and general overall market conditions, few

buyers are aggressively preparing for an economic upturn even though for some it

has already begun. While a narrow focus on costs and the bottom line is expected

and advisable during recessionary times, buyers that wait too long to refocus on

growth risk falling behind their competitive peers as the economy picks back up.

Demand Trends by Functional Area

EquaTerra advisors see demand trends by functional area (e.g., F&A, HR and IT)

continuing in the same direction in 3Q09 as the past few quarters (see Figure 9).ITO was the strongest functional demand area, followed by FAO. HRO demand levels

continued to remain weak as customer care outsourcing slipped past HRO to take

the number three spot in the poll. HRO was identied as the top area of demand

by just 12 percent of advisors, the same percentage that identied procurement

outsourcing. As one EquaTerra advisor who supports HRO noted, In an economic

downturn HRO will contribute only modestly to improvement of the company

baseline. If a trade-off is made between spending consulting dollars on HRO or other

initiatives (e.g., source-to-pay outsourcing), then HRO will not prevail.


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Advisors: Demand by Functional Area

0% 20% 40% 60% 80% 100%

Procurement

HRO

CC/CRM

FAO

ITO

3Q09

3Q08

3Q07

Figure 9

ITO was also the top area of demand cited by service providers in 3Q09 (see Figure

10) followed by FAO and HRO. It is important to note that demand levels registered in

the Pulse surveys are impacted by the particular outsourcing service providers polled

in any one quarter

Service Providers: Demand by Functional Area

0% 10% 20% 30% 40% 50%

CC/CRM

Other

HRO

FAO

ITO

3Q09

3Q08

3Q07

Figure 10

EquaTerra continues to see growth in demand for outsourcing beyond the back

ofce in non-traditional functional and process areas like research and development,

real estate services, facilities management, analytics and other areas of knowledge

process outsourcing. Demand in these areas has been impacted by current market

conditions that in some cases have lessened the need for these services, but in

others have made outsourcing more appealing as buyers seek to reduce costs and

overhaul service delivery models. New areas of outsourcing focus are also often

industry specic, for example, remote metering and smart grid initiatives in the

utilities industry; clinical trials, analytics and R&D in life sciences; and document

service outsourcing in paper intensive industries like healthcare and the public sector.


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The growing importance of document services was highlighted recently with the

announced acquisition by Xerox of BPO/ITO service provider ACS by Xerox, which has

a large document service outsourcing practice and is looking to expand into moremainstream areas of BPO and ITO.

The charts on the following two pages illustrate outsourcing demand by process

area for the four major functional areas IT, HR, F&A and procurement covered

in the Pulse surveys. There are no major changes in demand levels across these

functions and processes compared to recent quarters. EquaTerra introduced a new

classication scheme for procurement, or source to pay, outsourcing this quarter.

It provides a more granular analysis of procurement outsourcing usage and is

complemented by a new question assessing the spend categories most frequently

outsourced in these efforts.


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Advisors:

Functional and Process Area Demand

Advisors: HRO Demand

0% 20% 40% 60% 80% 100%

Compensation

Workforce Effectiveness

Learning/Training

Recruiting/Talent Mgmnt

Benefits

HR IT

Payroll

3Q09

3Q08

3Q07

Advisors: FAO Demand

0% 20% 40% 60% 80% 100%

Finance, Control, Risk Mgmnt

Travel & Entertainment

General Accounting

AR/C&C

Accounts Payable

3Q09

3Q08

3Q07

Advisors: ITO Demand

0% 20% 40% 60% 80% 100%

Packaged Apps Svcs

Networks/Telco

Desktop Services

ADM

Infrastructure/Ops

3Q09

3Q08

3Q07

Advisors: Procurement Outsourcing Demand by Process

4%

7%

9%

9%

11%

13%

20%

24%

39%

46%

52%

Logistics/freight mgmnt

Supplier base research

Savings tracking

End-to-end category mgmnt

Supplier performance mgmnt

Procurement help desk

Spend analytics

Tactical/spot buying

Accounts payable

Procurement operations

Strategic sourcing

Advisors: Procurement Outsourcing Demand by Spend

Category

4%4%4%4%

8%8%

10%12%

14%16%16%

18%25%

29%33%

71%

FleetMeeting services

R&DUtilities

Marketing/market rsrch/adsTransportation & logistics

Direct goods & servicesMRO

TravelOffice supplies & fixtures

Temp/contingent laborFinance and InsuranceEmployee/HR services

Facilities mgmnt/real estateConsulting/legal/professional

IT

Service Providers:

Functional and Process Area Demand

Service Providers: HRO Demand

0% 20% 40% 60% 80% 100%

Workforce Eff.

Compensation

Learning/Training

Recruit/Tal. Mgmnt

HR IT

Benefits

Payroll

3Q09

3Q08

3Q07

Service Providers: FAO Demand

0% 20% 40% 60% 80% 100%

Decision Support

Fin, Control, Risk Mgmnt

Travel & Entertainment

General Accoutning

AR/C&C

Accounts Payable

3Q09

3Q08

3Q07

Service Providers: ITO Demand

0% 20% 40% 60% 80% 100%

Networks/Telco

Packaged Apps Svcs

Desktop Services

Infrastructure/Ops

ADM

3Q09

3Q08

3Q07

Service Providers: Procurement Outsourcing Demand

by Process

11%

11%

33%

44%

44%

67%

67%

End-to-end category mgmnt

Inventory mgmnt

Supplier base research

Spend analytics

Strategic sourcing

Procurement operations

Accounts payable

Service Providers: Procurement Outsourcing Demand

by Spend Category

8%

8%

8%

17%

17%

33%

33%

42%

42%

50%

Consulting/legal/professional

Direct goods & services

Facilities mgmnt/real estate

MRO

Finance and Insurance

Office supplies & fixtures

Temp/contingent labor

Travel

Employee/HR services

IT


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Demand Trends by Functional Area: Deeper Dive

This quarters Pulse survey took a deeper dive into trending in both procurement and

information technology outsourcing.

Procurement Outsourcing: Key Success Factors

In addition to reformatting the question on process demand levels for procurement

outsourcing and adding a new question on outsourced spend categories,

EquaTerra polled both service providers and its advisors on the key success factors

in procurement outsourcing efforts (see gure 11). EquaTerra is also in the process

of conducting a more in-depth market study of both buyers and providers on

procurement outsourcing trends. Final results from this study will be available later

in the fourth quarter of this year. Preliminary results are in line with the ndings

presented below.

There was consensus between advisors and serv ice providers as to the most

critical procurement outsourcing success factors. Fifty-four percent of service

providers and 50 percent of advisors cited transparent and agreed upon

savings measurement and tracking process as the most important factor.

End-to-end process scope (e.g., full source-to-pay cycle vs. single process

management) was the next leading factor cited by 41 percent of advisors and

38 percent of service providers. Deep service provider category expertise was

ranked the second most important factor by providers.

Strong change management/compliance management was highly ranked by

both advisors and service providers.

EquaTerra has found that tough economic times have increased buyer interest in

procurement outsourcing. Procurement outsourcing goals are centered on both

reducing procurement organization operating costs, as well as redirecting the

procurement group to focus on more strategic activities. Enabling the latter is

the key to driving growth in the procurement outsourcing market. Procurement

outsourcing also can directly and indirectly support buyer organization efforts to

reduce overall spend and drive supplier consolidation and rationalization efforts.


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Key Procurement Outsourcing Success Factors

0% 20% 40% 60%

Gain sharing tied to achieving / exceeding savings targets

Category scale

SP risk tied to underachieving savings targets

Client comfort with SP protection of confidential info

Enabling technology to support S2P process

Strong client category sponsorship

Deep provider category expertise

Strong change/compliance management

End-to-end process scope

Transparent/agreed savings measurement/tracking process

Service Providers

Advisors

Figure 11

ITO Trending: Application Development and Maintenance

In the 3Q09 Pulse survey EquaTerra assessed market trending in three dimensions of

ITO: ADM, SaaS and RIM.

ADM has been one of the hardest hit outsourcing market segments over the

past 24 months. The development side of ADM often is viewed by buyers as

more discretionary. Given many of these efforts are contracted as shorter term

engagements or via contract labor, they are easier to slow down or stop than more

comprehensive outsourcing efforts when budgets get tight. Many buyers during

growth years signed up with ADM providers that often were smaller and India-based,creating a fragmented supplier base ripe for consolidation. Custom application

development work is impacted by the growth of SaaS as an alternative model to gain

access to new software. Buyers are exhibiting a growing desire and acceptance for

more standardized, packaged software offerings delivered as part of an outsourcing

effort in lieu of developing new custom applications from the ground up.

EquaTerra polled service providers and its advisors on six dimensions of the current

ADM market. Respondents were asked to rank their level of agreement with each

statement on a one-to-ve scale where one represented strongly disagreed and ve

strongly agreed (see gure 12).

Both advisors and service providers agreed the strongest trend in the currentADM market is that buyer interest in custom ADM work has declined in

favor of using off the shelf commercial software (e.g., customer relationship

management, enterprise resource planning (ERP)). This is not necessarily a

new trend but one that has been accelerated by current market conditions.

Additionally, with service providers scoring this question at 3.5 and advisors

3.26 on the one-to-ve scale, the level of agreement with the statement is

more moderate than strong.


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There were mixed opinions between advisors and service providers as to

whether multinational or India-based service providers are beneting more

from buyer ADM supplier consolidation and rationalization efforts. The morelikely losers in any market shake-out are tier two and three providers rather

than tier one Indian or multinational service providers.

Both advisors and service providers were more likely to disagree, albeit

modestly, that buyer demand for outsourced ADM remains weak. Many buyers

view it as a discretionary spend viably delayed or believe buyer interest in

custom ADM work has declined in favor of using SaaS offerings.

A key trend highlighted in the ADM market is that buyers are rationalizing supplier

bases and consolidating work with fewer suppliers. This will lead to fewer, but larger

and longer term ADM contracts. Coupled with the longer term growth of the SaaS

market, this means continued tough times for smaller ADM players and ongoing

consolidation and attrition in the supplier market

ITO Trends: ADM

1 2 3 4 5

Custom ADM demand has declined in favor of SaaS

offerings

ADM demand weak as many buyers view it as a

discretionary spend viably delayed

Buyers are actively consolidating the ADM s upplier base

to no one class of service providers benefit


to the benefits of multinational service providers


to the benefits of India-basedservice providers

Buyer interest in custom ADM work has declined in favor

of using off the shelf commercial software

1= Strongly disagree, 5=Strongly agree

Service Providers

Advisors

Figure 12

ITO Trending: Software as a Service

SaaS is similar to outsourcing in that it enables a buyer to access new software

capabilities without having to build and then host and manage the software

applications themselves. More often in todays market SaaS is an alternative to

purchasing and installing traditional commercial software applications within a buyer

organization. In both cases market uptake often is being driven by business unit

owners. They are looking for more turnkey solutions that circumvent and alleviate

pains and challenges associated with implementing internally hosted and managed

commercial software or undertaking traditional software application outsourcing.

These issues include having to extensively involve the IT group in the selection

and decision-making process, as well as addressing the complexities and potential

limitations of introducing new software into the corporate operating environment.


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The focus of the question in the 3Q09 Pulse was to what degree buyers view SaaS

as complementary or an alternative to traditional outsourcing. Figure 13 illustrates

that there is agreement between service providers and EquaTerra advisors that mostbuyers have not yet formed a solid or consensus opinion on SaaS offerings relative to

traditional outsourcing efforts.

Adopting SaaS offerings can reduce implementation costs and challenges and lower

ongoing support costs. Depending on the application, however, integration back

into buyers internal systems can add to upfront and ongoing complexities and costs.

While SaaS applications may offer some of the same functionality buyers seek from

BPO, SaaS vendors do not offer the same level of support, application management

and ownership BPO can deliver. Given where the market is today, the onus and

opportunity rests with both outsourcers and SaaS vendors to drive buyer opinion in a

favorable direction relative to their offerings.

ITO Trends: SaaS

0% 50% 100%

SaaS viewed as alternative to traditional

outsourcing

SaaS viewed as complementary to traditional

outsourcing

Most buyers have not yet formed a solid

opinion on SaaS relative to traditional

outsourcing

Service Providers

Advisors

Figure 13

ITO Trending: Remote Infrastructure Management

The third area of the ITO market assessed in this quarters Pulse survey was RIM. RIM,

like cloud computing, is a term and concept with mixed meanings in the market.

Some question whether RIM really is a new and improved service delivery model or

just a new marketing concept. Most IT infrastructure outsourcing, for example, has

involved services being delivered and managed off-site. Legacy infrastructure serviceproviders like CSC, HP and IBM have all long had global networks of service delivery

centers. Does it really matter if off-site is now farther away or offshore?

RIM is as much about a new class of India-based service providers entering the

infrastructure outsourcing market as it is a new delivery model or paradigm. Buyer

uncertainty over RIM is reected in the Pulse surveys ndings. Advisor and service

providers polled were asked to rank their level of agreement with three statements

about RIM on a one-to-ve scale where one represented strongly disagreed and ve

strongly agreed (see gure 14).


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EquaTerra advisors showed the greatest agreement, though just over the mid-

point at 3.50, that many buyers have not formulated a strong opinion on RIM

and it is s till largely a provider-driven concept. Not surprisingly, this was thestatement service providers agreed with least, scoring it at a 2.75.

Providers scored highest at 3.83 the statement that many buyers view RIM

as a means to meaningfully improve the quality and/or reduce the costs of IT

infrastructure services, while advisors scored this one at 3.44.

Advisors and service providers agreed that many buyers have not formulated a

strong opinion on RIM and it is still largely a provider-driven concept.

RIM represents an incremental evolution in how providers deliver outsourced

IT infrastructure services. It will further drive commoditization in the market by

increasing the focus on cost. As the top tier of the infrastructure outsourcing serviceprovider market continues to consolidate and Indian players with a more diverse set

of complementary offerings make further inroads, infrastructure outsourcing will

increasingly become one component in larger outsourcing efforts.

ITO Trends: RIM

1 2 3 4 5

RIM viewed the same way as traditional

infrastructure ITO

RIM viewed as means to meaningfully improve

the quality and/or reduce IT infrastructure

costs

Most buyers have not yet formed a strong

opinion on RIM

1= Strongly disagree, 5=Strongly agree

Service Providers

Advisors

Figure 14

Demand Trends by Industry

The two charts below illustrate industry demand as cited by EquaTerra advisors and

service providers. Industry rankings generally have been consistent over the past few

quarters.


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Advisors: Demand by Industry

0% 10% 20% 30% 40% 50%

CPG, Food/Bev, Retail,Wholesale

Govt (Fed, State, Local), Edu

Pharma/Biotech

Energy/Utilities, Oil & Gas

Banking, Fin Svcs, Insurance

3Q09

3Q08

3Q07

Figure 15

Service Providers: Demand by Industry

0% 20% 40% 60% 80%

Telco

High Tech Products/Svcs

Manufacturing

CPG, Food/Bev, Retail,

Wholesale

Banking, Fin Svcs, Insurance

3Q09

3Q08

3Q07

Figure 16

Outsourcing demand remains solid in the banking and nancial services industries.

This is not surprising given the challenges buyers in these sectors are facing and their

need to reduce costs, but shows buyers are still pushing sourcing efforts forward

despite other operational challenges. Public sector demand remains strong, though

it is comprised of a proportionally higher percentage of non-outsourcing third-party

services. Ironically, there is evidence that newly infused stimulus money is beingspent on third-party services. Public sector organizations are showing increased

interest in moving from legacy customer software application environments to

commercial ERP systems as a means to reduce operating costs and to improve and

standardize service delivery models. Finally, energy and utility buyers are focused

on reducing operational costs through internal shared service operations and

outsourcing.


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Sales Cycle

For the purposes of the Pulse surveys, the sales cycle is dened as the time period

from RFP release to contract signing. Many factors contribute to the length of the

sales cycle, including:

What is being outsourced

Level of buyer sophistication and experience

Complexity, size and regional/global reach of the potential outsourcing deal

Degree of multi-sourcing present in the deal por tfolio

Preferred service provider sales pursuit capacity and selectivity

Whether a sourcing advisor is being used

Disruption to the sourcing process due to turmoil in the buyer organization,

economic uncertainty, or changing macro-business all heightened issues in

the current market

The Pulse surveys do not measure the absolute length of sales cycles. EquaTerra

estimates, however, the sales cycle for larger deals (those with more than $50 million

in total contract value, or TCV) that are competitively bid typically is six to 12 months

barring deal ow disruption from the time the buyer goes to the market until the

deal is closed. The time frame typically has been compressed 15-25% over the past

year given market conditions.

Current market trends are contributing to both shortening and lengthening sales

cycles. Smaller deals pursued by more experienced buyers can lead to shorter sales

cycles. On the other hand, the complexities associated with multi-sourcing can

complicate the sourcing process and extend the sales cycle, as can considering more

intricate pricing arrangements. EquaTerra sees most buyers today more intensely

scrutinizing pricing models and levels. Global deals also are more complex to source.

The major factor impacting sales cycles over the past year, however, has been

sourcing cycle disruption caused by economic events. While deal ow is improving in

the market, EquaTerra expects to see economic conditions and uncertainty continue

to complicate the sourcing process into the rst half of 2010.

Figure 17 illustrates sales cycle trends according to service providers polled in thisquarters study. Sales cycle trending improved modestly for the second consecutive

quarter.

Twenty-six percent of service providers indicated sales cycles were lengthening.

This level is above the survey average but just one percent higher than last

quarter.

Twenty-one percent of service providers indicated sales cycles were shortening,

the highest level recorded in more than three years.


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Service Providers: Sales Cycle

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

Lengthening Same Shortening

Figure 17

Pricing Competitiveness

Increased pricing competitiveness implies the buyer has the upper hand and is

getting a better priced outsourcing deal. As pricing is one element of determining

protability, the alternative of less competitive pricing is generally favorable to the

service provider. The consensus from the middle of 2008 through earlier this year

among service providers, especially India-based rms, has been that buyers are

getting more aggressive with their pricing demands. This trend began to reverse

itself last quarter. At the peak in 1Q09, 75 percent of service providers indicated

pricing pressure was increasing. This level has receded over the past two quarters.

Figure 18 illustrates pricing trends according to service providers in this quarters

study.

Just thirty-two percent of service providers polled indicated that pricing

pressure increased in the quarter. This is back below the survey average of 41

percent and the lowest level recorded since the end of 2007. Indian service

providers continued to cite increased pricing aggressiveness more frequently

than multinationals.

The balance of service providers polled indicated pricing pressure remained

unchanged. This highlights that while pricing pressure still is not increasing as

much, it is not necessarily declining.


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Service Providers: Pricing

0%

10%

20%

30%

40%

50%

60%

70%

80%90%

100%

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

More Aggressive Same Less Aggressive

Figure 18

While there is a stronger desire among buyers today to get more aggressive

with pricing, a number of factors ultimately can temper nal pricing levels. More

experienced buyers generally are aware that the lowest price may not lead to the

best deal. There is concern now in the market among buyers about entering into

deals today that will fail because of bad pricing. Buyers also can reduce overall spend

the ultimate goal by lowering consumption levels, but still pay an equitable unit

price for services that helps ensure they get the providers top resources.

Service providers inuence pricing competitiveness by the extent of their own

aggressiveness in pursuing deals. More service providers in the market today are

increasingly selective about the clients and deals they pursue. Service providers are

more closely assessing the risk proles of clients they are pursuing and adjusting

their pricing accordingly. Buyers in nancially difcult situations or industries are

treated with higher risk premiums and contract terms that can increase deal pricing.

Buyers in good standing or seen as highly strategic will receive attractive pricing

even with similar risk proles and even though the provider is not offering blanket

market reductions. Providers continue to look for ways to reduce operating costs

and overhead to meet their current contract commitments, while pushing price

competitive policies regardless of the economic downturn. The net result is more

aggressive pricing in the market, but not routinely egregious pricing terms, at least

for top tier service providers or less desirable buyers.

Deal Scope

Deal scope is dened as the number of processes, users, geographies, etc. included

in an outsourcing arrangement. Contract value usually is directly correlated to scope,

though the mix of remote/low-cost delivery resources involved also affects contract

value. From the outsourcing buyers perspective, understanding trends in scope and

contract value helps not only to determine how aggressively other organizations are


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pursuing outsourcing, but also how to dene and construct a viable and potentially

optimal-sized deal. The growth of the multi-sourcing/multi-provider outsourcer has

both driven and resulted from smaller deal scope. On average, scope levels havebeen at to declining for the past two years.

Figure 19 illustrates deal scope trends according to service providers polled in this

quarters study.

Just 16 percent of service providers polled indicated that scope was increasing,

down 10 percent from last quarter and the lowest level recorded in the life of

the service provider Pulse surveys.

Twenty-one percent of service providers indicated that scope level had

decreased, down ve percent from last quarter when the highest level

recorded in the life of the surveys was registered.

Service Providers: Scope

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

Decreased Same Increased

Figure 19

The ongoing decreases in scope levels highlight greater buyer interest in smaller,

more manageable and quickly executed deals. Buyers also are closely scrutinizing all

deal components and paring back anything deemed peripheral or discretionary.

Service Providers: Contract Proftability and Ability to

Increase Scope

A variety of factors impact service provider protability, including deal scope,

transition costs and time frames, and buyer pricing sophistication. Exchange

rates affect serv ice provider protability, particularly rms with extensive global

operations. Wage ination in offshore markets had been an issue for the past

several years, but has largely dissipated, at least for the time being. Service providers

with a higher mix of remote/low-cost resources had been putting pressure on the

protability of competitive peers with fewer lower-cost resources for the past several

years. This pressure has eased over recent quarters as more providers globalize,

exchange rate trends shift and market growth slows.


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The biggest factor impacting contract protability today is buyer pressure on

pricing and aggressive competitiveness between providers. Over the past year all

providers have faced pressure on existing contract protability. This has resultedfrom buyer pricing pressure, more competition for business, buyer pull-back on more

protable discretionary services, and an increased focus on cost cutting over process

improvement work.

Figure 20 illustrates contract protability trends according to service providers polled

in this quarters study. The Pulse survey addresses protability on existing contracts,

not new deals in the pipeline.

Fifty percent of service providers polled indicated contract protability was

improving, the same level recorded last quarter. Multinational service providers

were more likely to cite improving protability than were India-based service

providers.

The balance of serv ice providers cited no change in protability levels, and no

providers indicated declining protability in existing contracts.

Service Providers: Contract Proftability

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Figure 20

Figure 21 illustrates service provider expectations about their ability to increase

scope in current accounts. All providers today are very focused on growing business

in existing accounts because pursuit costs are lower than competing for new

business and they must protect their base as buyers rationalize suppliers and cut

back on spend levels.

Sixty-one percent of service providers expected to increase scope in current

accounts. This is a three percent decline from levels recorded last quarter and

the second straight quarterly decline.

Just six percent indicated scope would decline in existing accounts.


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Service Providers: Ability on Increase Scope

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Figure 21

Service Provider Capacity

Service provider capacity is an important factor that inuences other trends, such

as pricing competitiveness, sales cycles and protability. EquaTerra denes service

provider capacity as the availability of adequate and skilled resources for sales

pursuit, engagement and transition/delivery. The challenge service providers face is

the scarce supply of quality experience, which takes time and multiple outsourcing

deals to develop.

Capacity also is tightly linked to service provider aggressiveness in deal pursuit. When

service providers are being more selective and entering into fewer deals, as is often

the case in todays BPO market, they need less capacity for pursuit and delivery.

Capacity is intentionally constrained to keep costs down and to match capacity to

demand goals. As both buyers and service providers focus more on smaller deals

with fewer processes in scope, capacity pressure is lessened within individual deals

but exacerbated as more deals are in ight. Disruptions in deal ow over the past

year have contributed to service provider pursuit capacity constraints.

Figures 22 through 24 illustrate combined capacity levels for pursuit and delivery,

and then separately break out the two.


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Advisors: Service Provider Capacity, Overall

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Figure 22

Advisors: Service Provider Capacity, Pursuit

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Figure 23

Advisors: Service Provider Capacity, Delivery

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Figure 24


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Overall capacity levels remained largely unchanged in the quarter after seeing

gradual improvements over the past year. Twenty-six percent of advisors cited

constrained or tightening serv ice provider capacity, down 12 percent from lastquarter (see Figure 22) and the rst quarter over quarter decline since 2Q08.

Nineteen percent of advisors overall cited improved capacity, down slightly

compared to last quarter and 3Q08.

Capacity for sales pursuit and deal structuring (see Figure 23) improved in

the quarter. Twenty-six percent of advisors cited constrained levels, down 12

percent from 2Q09 and the rst quar ter over quarter decline since 2Q08.

Sales pursuit capacity is dually impacted by more supplier selectivity (improves

capacity) and more market demand (strains capacity, especially as service

providers manage down pursuit costs). Budget pressures and reduced funding

by providers for deal pursuit also hurt capacity.

Capacity levels for deal transition and delivery remained steady for the quarter

(see Figure 24). Constrained or tightening citation levels came in at 27 percent,

down 11 percent from last quarter and four percent form 3Q08. Just 15

percent of advisors, however, indicated transition capacity was adequate or

improving, down quarter over quarter and year over year.

Both sales and delivery capacity vary across functional areas of outsourcing and

across different supplier classes. Sales pursuit capacity is more constrained in EMEA

(cited by 31 percent of advisors) than in the Americas (18 percent of advisors). While

constrained capacity levels cited were higher among EMEA advisors, the levels

declined from last quarter. Advisors who primarily support BPO efforts were morelikely (24 percent) to cite improved levels in transition capacity than those advisors

who support ITO (10 percent).

EquaTerra advisors offered the following comments on the reasons for positive and

negative changes in service provider capacity.

Pursuit capacity

Many service providers are stretched and we see many working multiple

deals resulting in less attention to the client and solution than in previous

years.

Providers have matured and they are now including their delivery teams in

the sales pursuit which certainly keeps them much more honest about what

they promise.

While capacity is unchanged, providers are more cognizant of the cost of

pursuit.

Delivery capacity

Limited resources (A players) are scarce as they are required to stay on

existing clients longer and longer, thus not available for transition or initial

delivery.


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Good transition managers would appear to be even scarcer than good

sales managers.

The providers have been constrained for some time. They have been

focused on increasing their experienced resources which may not be

adequate yet given the increased number of deals.

Providers are dealing with buyers who are slow, cautious and prone to

elongated approval processes.

Outsourcing service providers typically have been more optimistic about their own

capacity. Figure 25 illustrates contract pursuit and delivery capacity trends according

to service providers polled in this quarters study.

Forty-two percent of service providers indicated capacity was adequate or

increasing, up two percent from last quarter and up slightly year over year.

India-based service providers were somewhat more likely to indicate capacity

was improving.

Just ve percent of providers indicated that capacity was constrained or

tightening, down signicantly from levels recorded in earlier quarters.

Providers concurred that more client and deal selectivity is helping to improve sales

pursuit capacity levels. The ongoing expansion of global delivery footprints similarly

is helping improve transition and delivery capacity as is continual improvement to

remote delivery capabilities. On the issue of the quality of sales or pursuit capacity,

advisors and service providers continue to have differences of opinion

Service Provider Capacity

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Figure 25


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Common Buyer Responses to Current Market Conditions


Last quarter the Pulse survey assessed the challenges buyers have with the transition

process in outsourcing deals. Successful transition efforts are key to getting

outsourcing efforts off on the right foot and to providing a solid base from which

to launch ongoing outsourcing governance efforts. Unfortunately the consensus

among service providers and EquaTerra advisors was that more often than not buyers

struggle with outsourcing transition.

This quarter the Pulse surveyed assessed the most common activities that buyers

have become more aggressive about undertaking, given current market conditions,

in outsourcing deals already in ight. Advisors and service providers were asked to

identify how frequently they are seeing eight different activities in the market and

rank them on a one-to-ve scale, where one represents very uncommon/infrequently

undertaken and ve represents very common/frequently undertaken (see gure 26).

The most common activity, according to EquaTerra advisors, which scored

3.83 on the one-to-ve scale, was reopening contracts to renegotiate pricing

levels. Service providers scored this activity at the mid-point on the scale. The

most common activity cited by service providers perform more thorough

benchmarking/base lining when preparing for new outsourcing efforts

scored 3.56.

Also scored above the mid-point by both advisors and service providers was

pushing for more outsourced work to be performed in low cost/offshore

locations and overhauling outsourcing governance operating models, for

example, by consolidating efforts. Last quar ters Pulse survey took a deeper

dive into global sourcing trends.

There were no major variations between different classes of EquaTerra advisors.

The greatest difference was with enforcing benchmark clauses in existing deals,

which was scored 2.84 by advisors in the Americas and 3.57 by EMEA advisors.

Similar to the questions above, no activity scored above 4.0 or below 2.5 on the ve-

point scale, highlighting these activities are occurring but are far from universal in

uptake. Buyers are advised to regularly review their options relative to undertaking

any of these efforts.


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1 2 3 4 5

Pushing for more work in nearshore or onshore locations

Overhauling outsourcing governance efforts

Enforcing benchmark clauses in existing deals

Reopening contracts to renegotiate service levels

Reopening contracts to renegotiate scope

Pushing for more work in low cost/"offshore" locations

Benchmarking/baselining when preparing for new efforts

Reopening contracts to renegotiate pricing levels

1= Uncommon/infrequent, 5=Very common/freq

Service Providers

Advisors

Figure 26

Service Provider Market Update

On an ongoing basis, EquaTerra conducts a comprehensive market study of ITO

service provider performance and satisfaction (expanding to FAO providers 2H09).

The ITO studies cover all major European markets, and the FAO program being

launched is global in nature. EquaSiis, an EquaTerra company, now manages the

Service Provider Performance Studies. This market study program surveys and

interviews buyers actively engaged in outsourcing efforts with a named set of

leading market-specic providers. The research unveils direct insights into buyer

opinions on service provider performance levels, also assessing and interpretinggeneral outsourcing demand and activity trends in the markets covered. Market

coverage and due dates for the next editions of these studies are as follows:

U.K. (next release 4Q09)

Netherlands (next release 1H10)

BeLux (next release 2Q10)

Nordics (next release 2Q10)

Germany (rst release 4Q09)

Pan-European ITO (released 2Q09, updated yearly)

Pan-European and North American FAO (rst release 4Q09)

Global HRO (planned 2010)

Global ITO (planned 2010)

Click here for additional details on this research offering and to get copies of

executive summary reports for all of the completed research efforts. EquaTerra also

conducts ITO service provider Pulse surveys in the Netherlands and U.K. markets in

parallel with the global advisor and service provider Pulse surveys. It also conducts

period vertical industry Pulse surveys. Click here for additional details on all Pulse

research programs.
http://www.equaterra.com/fw/main/Pulse-Survey-Results-1030.htmlhttp://www.equaterra.com/fw/main/Pulse-Survey-Results-1030.html


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Deal Snapshot

The number of outsourcing deals closed in the quarter was low by historical

standards and in line with numbers from last quarter. EquaTerra estimates

approximately 95 outsourcing deals (in ITO and the functional BPO areas covered

in the Pulse surveys) with greater than $50 million in TCV were announced in 3Q09.

Average TCV for these deals was approximately $190 million. This compares to

approximately 90 deals with an average TCV of $225 million in 2Q09. Excluding a

large network outsourcing deal at Sprint with Ericsson, the average TCV was just

in the $150 million range. Only a handful of these deals were purely BPO. When

estimating the number of new deals and average TCV, it is important to recognize

that some deals are not publicly announced or deal details are not provided. The

ultimate TCV of a deal also is likely to change over the life of the contract. There were

approximately 175 total BPO and ITO deals with TCV levels greater than $25 million in

the quarter, up from 135 in 2Q09, reecting the average smaller size of deals making

it into the market.

Following is a select list of some of the top deals announced in 3Q09.

Select Top Deals

IBM win estimated at $250M over ve years with Carrefour (French retail rm).

IBM will provide data center and infrastructure services, including security

related services.

Tech Mahindra win estimated at $400M with Etisalat DB Telecom (joint venture

between UAEs Etisalat and Indias Dynamix Balwas). Tech Mahindra will provide

customer billing solutions and related IT infrastructure services.

IBM win estimated at $700M over ve years with BP. IBM will manage and

run BPs enterprise applications and integrated serv ice desk responsibilities,

especially supporting SAP applications. BP also awarded major contracts in the

quarter for application development and support and related IT services to

Accenture, Infosys, TCS and Wipro.

HP win estimated at $400M over ve years with Vale (Brazilian mining

rm). HP will provide IT infrastructure services globally, including midrange,

mainframe, storage and disaster recovery services, as well as run Vales global

communications network and provide managed print services.

CSC win estimated at $490M over up to ve years with the US Transportation

Security Administration (TSA). CSC will support TSAs IT Infrastructure Program

(ITIP) that delivers IT security, applications and related IT and business serv ices

to TSA operations centers.

IBM win estimated at $200M+ over seven years with Qantas. IBM will provide a

variety of project delivery services and tools. IBM inked a major ITO deal with

Qantas in 2004.


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Service Providers: Current Deal Portfolio Status

In the nal section of the Pulse survey, EquaTerra asked service providers to prole

the state of their deal portfolio from several dimensions:

Recompetes/Renegotiations

Cancellations/Non-renewals

Problem Contracts

These results are provided for informational purposes only and to highlight ongoing

market directional trending. They do not represent actual deal totals in any of

the categories proled. The number of service providers citing increased levels of

recompetes and renegotiations fell for the third straight quarter to 21 percent.

Cancellation and problem account levels remained largely unchanged.

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Figure 27

Service Provider Cancellations and Non-renewals

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Documents

EquaTerra Whitepaper 3Q09 Pulse Report Oct2009 3123