Q1 2008 marks 2nd best annualized contract value ever
In April TPI, the world's largest sourcing data and advisory firm, announced the findings from its quarterly analysis of the global commercial outsourcing industry for the first quarter of 2008 and the previous six months. Worldwide it was the second-best first-quarter performance ever for annualised contract value, with most "new scope" contracts every for a single quarter.
Now SSON has caught up with TPI partner and managing director, Peter Allen, to discuss the significance of the report's findings and to get Allen's perspective on the state of the industry - and it's clear that the R-word is dominating industry thinking...
SSON: Can you start by giving us a quick overview of the index and what it’s saying about the industry at the moment?
Peter Allen: I think to give that stance we have to put it in the context of the world’s economic climate, and it’s clear certainly in the US and among most Western economies there’s a current slowdown or drag in economic growth if not an outright recession. So the prevailing question we hear is, what role does outsourcing play in the survival and competitive strategies of major corporations in the face of an economic downturn. And that’s really the question we tried to answer in our Q1 report which covered the commercial outsourcing contract awards that were let in the first quarter of 2008, and for contrast we put those in the context of prior periods as well.
And what we saw was the rather healthy record of outsourcing awards in Q1 and when taken together with Q4 to form a most recent 6-month view it is an unprecedented volume of contract awards. And most of it represented what we call "new scope", so it’s not renegotiating or realigning existing agreements: it’s truly incremental demand coming to the marketplace.
SSON: Now you’ve highlighted the regional differences here: for example, "EMEA’s percentage of the global contract TCV [total contract value] and ACV [annualized contract value] is more of an indication of softness in the Americas than any absolute increase in EMEA". Do you think that’s something that’s going to trend for a while and is indicative of America leading the economic way, whether up or down?
PA: Well, what that says is that on an absolute basis EMEA is holding its own; its record was neither significantly higher nor lower than its historical level. It’s the Americas that really had fallen off in terms of award-values, and our sense here speaking from an American-economy participant’s point of view is that especially in the more mature outsourcing sectors such as banking or manufacturing there has been a pause in the most recent quarters as corporate executives took stock of just how deep the recession was likely to be, how deeply they needed to restructure their operations, to cut their costs, and what role their existing outsourcing relationships were likely to play in their sourcing strategies.
So the thing to keep in mind here is, the TPI index generally reports on new contract awards. And by our account there are well over 2,900 active outsourcing agreements in place among corporations and service providers today in the market. And when you need to pull the trigger fast, and you need to get costs down fast, and restructure operations fast, often the first place to turn is your existing service provider relationship, not go through the laborious time-consuming process of structuring a new relationship. So what we are showing here is that in the Americas, where there seems to be perhaps a more acute and instantaneous reaction to the recessionary impact corporate executives have either deferred decisions to start new initiatives, or they are leveraging more actively their existing outsourcing relationships.
SSON: Is there any relationship between that and the fact that this is an election year in the US and people are uncertain as to what the outcome is going to be?
PA: No, I really don’t. Having been in this industry for longer than I care to remember we’ve gone through several election-year periods in which occasionally the outsourcing and offshoring words are used by either the media or the candidates to strike a hot iron. We find that it has very little play in the corporate boardrooms; whether we have a Democratic or a Republican president might matter to some level of financial planning but in terms of structure of companies to succeed in global markets it’s trivial.
SSON: There has been a little bit of anti-outsourcing rhetoric coming from both Democrat contenders at the moment…
PA: You know, it’s a popular topic to appeal to the masses. Our dialogues are among the senior-most executives among global firms, and they recognize that their survival and their ability to win in their markets depends upon having the right products at the right prices in the right markets. So they’re really not concerned about which party the US president is affiliated with.
SSON: Let’s move away from the outgoing side and look at some of the countries receiving the deals that you’re measuring. Have you noticed any change in target destination: is India still holding its own, is China finally moving ahead?
PA: India has a very strong lead here in terms of existing award-worth: I’ll tell you that many companies are now looking to second-tier cities in India and getting away from the historical top-tier locations like Bangalore.
SSON: Why do you think that is?
PA: The two reasons that we hear most often are: access to a less competitive workforce – it’s not a workforce that’s being fought over by so many other potential hiring companies – and the relaxation of the demands upon the infrastructure of those top-tier cities. We’re seeing the government in India strongly encourage the corporations to go to the smaller cities because the infrastructure within the top-tier cities is simply not able to sustain continued growth.
SSON: And what about China?
PA: In China we’re actually seeing the first real sign of tangible expansion into China principally being led by the corporations that are the buyers of outsourcing. So there’s been a lot of talk about China for many many years and certainly in aspects of software development China has a place. But when you get into the BPO domains -especially those that may have complex transactions and/or voice-related processes -China has not been very prominent. We’re now seeing many companies engage the outsourcing industry because those buyers have aspirations to be participants in the Chinese economy, and they want to establish operations there so they’re looking at outsourcing as a way to get in.
SSON: That almost sounds like – if you want to talk in traditional terms – a "loss-leader" to get into a new market; like they’re prepared to deal with the slightly less advantageous situation of being in China for the benefits that a presence in China can convey.
PA: That’s a very good observation. We look at sourcing strategies through three lenses: cost, capability and capacity, and the rationale for going to China has to be built around the dimensions of capacity and capability – because getting there takes some real effort in terms of cost and work to establish operations. There should be some cost savings but it may not be as immediate as going to India.
SSON: OK. What about smaller destinations like the Philippines, or maybe Egypt: have you seen any serious moves towards those?
PA: The Philippines, absolutely – especially for voice-based processes, and there’s been a bit of a resurgence in the Philippines as a destination for not only contact-centre operations but other BPO processes that demand voice interaction. And the voice may be with consumers, and external party, or just simply internal operations. So I think that the social and cultural affiliation between the Philippines and the West in terms of products, in terms of lifestyle, really is boding well for the increased demand for operations in the Philippines.
SSON: What about any other notable locations?
PA: We’ve seen some rather notable traction in Guatemala, Costa Rica, and Mexico, in addition to Brazil. To us the southern Western Hemisphere nations have always appealed intellectually because of the time-zone factor, but it’s taken a while for those countries to really get organized. The case is the governments are strongly encouraging the tax holidays, the favorable relationships with universities and the like, to draw the jobs to those destinations.
SSON: Is that more nearshoring from the States than offshoring from Europe and other destinations?
PA: Yes. The exception might be in banking, in which there are many global banks especially in the capital markets world that have operations in South America, although they may be headquartered in the Netherlands or the UK, or Germany or Switzerland for that matter, and those organizations may very well be driving Latin American operations as well.
SSON: Finally, and moving away from locations towards sectors: do you still see BPO being the dominant outsourcing model or is there a rise in KPO, LPO and the like? And has there been any shift in the type of industry that’s outsourcing, from traditional big markets like banking and pharma to less prominent outsourcing industries?
PA: We had a surprising dip in financial services in Q1, and we think that’s largely because of the [global economic] situation that’s distracting senior management from really making long-term commitments. We sense that we’re coming out of that. It’s interesting that we’re perceiving an interest among many companies that have established offshore operations of their own, captive centers, in either expanding or divesting those operations. And that’s true across manufacturing, financial services, insurance, pharmaceuticals and the like. It’s an interesting point that your readership might care about that most companies of size have some captive offshore operations and what we’re seeing is a question being posed: should we expand those operations drastically, or should we divest them? It’s a bit of a fork in the road in this recessionary period.
SSON: Well certainly for a lot of shared services practitioners that would suggest some sort of crunch time: do we outsource or do we bring even more stuff in-house?
PA: Exactly. In the shared service side of the world – and most shared service organizations have some flavor of offshore operations, maybe not in India but some place with lower-cost geography for service delivery - what we’re seeing is many of those organizations, those shared services leaders, asking themselves how fast and how big can they expand those operations, and if the answer isn’t fast enough or big enough then we need to divest it. It’s a stranded asset that we need to release, and not so much monetize but leverage a third party to help expand it.
SSON: That answer’s going to give a few people a few sleepless nights…
PA: Well, it’s happening in companies across industries.