By Robert L. Scheier
Despite a sluggish and uncertain global economy, Everest Group says the outsourcing and offshoring market held its own in the first quarter of 2012, with the number of transactions relatively flat even though fewer captive centers were created or expanded than in the last quarter of 2011.
“The global offshoring and outsourcing market holds steady, amidst a backdrop of global economic uncertainty,” said Everest Group Vice President Amneet Singh, driven by continued momentum in the BFSI (banking, financial services and insurance industry), especially in Europe.
Transaction volumes in the BPO market increased by 9% compared to the last quarter of 2011 while volumes in ITO market have remained similar to the fourth quarter of last year, said Research Director Salil Dani. BFSI and manufacturing increased by 12% and 11% respectively, while healthcare fell by 33%, he said.
BFSI Drives Demand
The BFSI industry accounted for 19 percent of the global outsourcing market in the first quarter, Everest analysts said, driven by business requirements such as regulatory compliance, customer acquisition and retention, and the need for such firms to create a global market presence. The weakness in the North American outsourcing market, they said, was especially evident in the health care industry.
Europe outside of the U.K. showed the strongest growth over the previous quarter, with the number of deals rising from 104 to 137, with the number of deals in North America falling from 173 to 150.
Six out of ten of the attendees said they are increasing their use of specialized service providers, echoing a trend the Everest analysts noted. Everest Group VP Katrina Menzigian said this is because functions specific to a particular industry make up a larger share of companies’ spending than do horizontal functions such as human resources or finance and accounting.
Among the industry-specific work being outsourced, she said, are functions such as trade reconciliation in BFSI and research in the pharmaceutical industry.
Mega Deals Not Dead
The trend to outsource more effort-intensive, industry-specific functions was also a driver, she said, behind the increase in “mega” outsourcing deals (with a total contract value of more than $1 billion U.S.), which dropped significantly during the worldwide recession. After falling from 13 in 2008 to only six in 2009, the number of mega-deals rebounded to 19 in 2010 and 2011, with two such deals (with a total value of $3.3 billion U.S.) in the first quarter of 2012.
Finance and accounting and procurement outsourcing contracts involving multiple processes saw larger increases in annual contract value than did those that involved the outsourcing of HR functions, Everest Group found.
In the finance and accounting area, Menzigian said the fact that the value of contracts is rising “is a sign of a well-run relationship” in which service providers are continuing to prove the value they are providing customers.
When it comes to locations, Everest found that service providers are much more likely to set up operations in lower-cost “tier-two” and “tier-three” cities than are captive service centers, which are owned by the customer receiving the services and work only for them. The Everest researchers said that the captives have higher levels of concern about both the quality and quantity of talent available in an area, and are much more risk-averse than service providers, who have developed more innovative ways to work around the limitations of smaller geographies.
In both Eastern Europe and Latin America, however, captives are more likely to turn to smaller locales for help than in the Asia-Pacific region. This is because, analysts said, the gap between the skills and infrastructure available in a Tier One versus a smaller city are “much more stark in Asia Pacific than in Latin America and Europe.”