IT Outsourcing Providers Could Profit from Double Dip Recession

CIO — The IT outsourcing market saw its first substantial decline in twelve months during the third quarter of this year. Transaction volumes fell for both the IT and business process outsourcing (BPO) markets, by seven percent and 12 percent respectively, according to the outsourcing consultancy Everest Group's quarterly report on the global services industry. The average contract value of BPO transactions plummeted by 50 percent, while the average contract value for IT contracts increased by 14 percent, thanks largely to three billion-dollar plus deals signed during the quarter.

"The global outsourcing and offshoring market is beginning to show signs of slowing growth in selective areas, but we'll need to see a few more quarters to determine if this is the beginning of a downturn trend," says Eric Simonson, Everest's managing partner of research.

Despite a decline in activity, Simonson remains cautiously optimistic in the medium term, given the level of new location activity by service providers. IT service providers opened 32 new outsourcing delivery centers in the third quarter compared to 17 the previous quarter. HP led the way by announcing ten new locations, followed by Dell, which announced four. Convergsys, IBM and Tech Mahindra each announced three new centers.

A second downturn in the economy—the so-called double dip effect—could have a big upside for outsourcing providers.

More than 40 percent of corporate IT leaders said that a double-dip recession would lead to increased outsourcing in their organizations, according to an October survey conducted by outsourcing analyst firm HfS Research. Another 46 percent said a second downturn would result in layoffs.

HfS Research also surveyed outsourcing providers and analysts and found that 61 percent of providers and 44 percent of advisors said their revenues would increase over the next six months if the economic situations worsens. Just 16 percent of advisors and six percent of providers said revenue would decrease. One-fourth of advisors and 21 percent of providers said revenue would remain the same, while 15 percent of advisors and 11 percent of providers said it's too early to tell what will happen with their revenue.

Corporate IT organizations may have no choice but to look for help outside their organizations if the financial situation continues to deteriorate. They made so many cuts in the previous downturn—in some cases to the bone—that outsourcing might be the only option for further productivity gains, according to HfS Research founder Phil Fersht.

Those IT decision makers considering outsourcing more aren't just looking for lower costs. While 40 percent said immediate cost cuts were a strong motivating factor, 43 percent cited greater flexibility to scale global operations as a strong impetus. Meanwhile, just over half said access to technology and support services as well as better access to standardized business processes were also somewhat motivating.

While many organizations shy away from public outsourcing announcements when unemployment is high and layoffs are looming, Fersht says that sending some of the remaining work to third parties can actually boost morale in corporate IT.

"You can only request your managers to increase their numbers of direct staff reports so much, and have them take on only so much extra work, until you get to the point of negative returns from your staff output," Fersht says. "Outsourcing can provide that opportunity to reenergize your top talent, [by bringing in] new resources and eliminating the ongoing cost-pressure."