Quarter two of 2014 has seen some key trends emerging in the global services sector as events and changes influence the pattern of business. From default on the Argentine debt to instability in the Ukraine, the Middle East and Africa, 2014 has seen several significant events unfold that, while not directly linked to global services do define part of the context of the industry at present. Market analysis firm, Everest Group highlighted key findings from their Market Vista Q2-2014 report in a webinar recently.
Emerging markets gaining traction in key verticals
While traditional strongholds like the UK and North America still lead in areas such as banking and healthcare, emerging markets are increasing their foothold in certain verticals, according to Salil Dani, Practice Director: Global Sourcing at Everest Group.
He said that there is a shift towards buyers looking towards emerging markets, especially in insurance, oil and gas, and manufacturing. “Due to the nature of the demand from emerging markets, verticals where there is strong interior or domestic demand present natural opportunities for offshoring or outsourcing,” he said, citing insurance as an example.
The insurance industry is growing at a significant rate: Swiss Re noted that robust emerging market growth would boost global primary life premiums by four percent in 2014 and 2015 in real terms. This growth, Dalil said, results in natural opportunities for organizations to enter into outsourcing agreements.
He noted that emerging market contract sizes tend to be smaller by a factor of 50 to 70 percent smaller, so while there is an increase in demand from insurance, for example, they are seeing relatively smaller sized and shorter term deals.
Latin America is evolving
H. Karthik, Partner leading Everest Group’s Global Sourcing area, said that Latin America’s growth in the Global Services sector is primarily to service Latin America and North America. He said that the region offers more unexplored opportunity than India or the Philippines and that locations in the region have grown and evolved.
The growth of interest in the region varies from country to country. In Mexico, Karthik said, it is largely around IT, with growth beyond Mexico City to Guadalajara, Monterrey and other tier-2 cities. In February, Everest Group released findings from a report that found that Mexico’s tier-2 cities offered significant operating cost savings across IT and BPO, with cities like Guadalajara offering a saving of 15 percent on average and those like Cuidad and Monterrey offering approximately 20 percent. According to the Everest Group’s Market Vista Q1 2014 report, the operating cost per FTE in Latin America is 25 to 60 percent of that for U.S. tier-2 cities.
Karthik noted that interest in Central America, on the other hand, is driven by bilingual voice work, while that in Trinidad and Jamaica is centered on English language work. Costa Rica has seen some companies already operating, increasing worries about saturation, but, Karthik said, the interest in the area is moving beyond voice work to more complex work.
“Many large enterprises that have used Global In-house Centers (GICs) in other parts of the world have used the service provider route to test the waters and grow in Lain America,” Karthik said. “There is still some risk perception in certain parts of Latin America and that is causing enterprises to think of different sourcing models in Latin America in comparison to the rest of the world.”
Unbundling of services and a strong anti-incumbency trend
Dani noted that there is increasing use of standalone solutions over bundled services. This, he said, is driven by “buyers trying to get best-of-breed of service providers for outsourcing contracts and avoiding long-term outsourcing deals.” The bulk of deals in the first half of 2014 represented three to five and five to seven year deals, with a falling number of seven plus year deals and an increasing number of deals under three years.
In addition, there is a rising anti-incumbency trend as clients opt to switch service providers. This is driven by increasing competition in the market.
According to Dani, the factors contributing to the anti-incumbency trend include: underwhelming service delivery; sophisticated buyers anticipating next-generation needs and aligning service provider choices accordingly; investments by aggressive providers to lower switching costs; and the unbundling of services in IT resulting in optimization needs and different provider choices. The Everest Group predicts that this will be a key trend to watch going into the second half of the year.
Other trends to watch
The report also highlighted other core trends such as leading players losing market share especially in mid to large markets. “There is a significant market share decrease in the large enterprise segment, especially in insurance, manufacturing and healthcare verticals,” according to the report.
Tier-2 cities are also becoming an important part of the market, with GICs more willing to evaluate them and tier-2 cities in Asia becoming important new center start-up sites.