Back-office Outsourcing: a Buyers’ Market

Companies have delayed outsourcing projects, leaving service providers waiting for the go-ahead.
Sarah JohnsonJuly 23, 2009

Companies considering outsourcing are now in the driver’s seat when it comes to negotiating contracts. On top of a big slowdown in the business-process outsourcing business, the offshore market is still recovering from the financial scandal at Satyam Computer earlier this year.

“Satyam made everybody more aggressive,” notes David Rutchik, a partner at outsourcing advisory firm Pace Harmon. “We’re encouraging clients to revisit their existing deals and look for opportunities in new deals. Buyers have much more of the upper hand than they had over the last few years.”

Indeed, outsourcing service providers have clogged pipelines. When the economy stalled more than six months ago, their clients put the brakes on projects – particularly jobs involving back-office services – leaving vendors and the overall outsourcing industry in standby mode.

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As a result, the first half of the year has returned dismal results for vendors. Total contract values for agreements worth at least $25 million were down 22% during the first six months of 2009, compared to the same period last year, according to outsourcing advisory firm TPI. And the number of signed contracts was down 11%, with only 135 contracts awarded during last quarter.

In order to meet 2008’s figures, service providers would have to ink $53 billon in total contract value during the second half of the year, which isn’t likely to happen, TPI says. Instead, for the year, the total value of all deals could fall below $80 billion, the lowest amount since 2001.

TPI attributes the fall mostly to the fact that business-process outsourcing – which looked ready to grow as information-technology outsourcing market began to level earlier this decade – has fallen off a cliff. TPI says BPO work has declined across regions and functions, including human resources, finance and accounting, and facilities management. The value and number of BPO contracts were at their lowest figures compared to the past five first-half periods. In fact, at $2.4 billion for Q2, total contract value is down 69% compared to the second quarter of 2008.

To be fair, the BPO market may be doing better than TPI’s data suggests. Smaller deals than the $25 million-plus ones that the firm tracks may be squeaking their way through. And there’s the fact that many projects are close to signature as outsourcing vendors wait for the OK from their clients that have been wary of starting anything new when the economy went south. While the BPO market does contain a good deal of pent-up demand, “the question is when that’s really going to play out [and whether jobs will be released this year],” Mark Mayo, partner and president of TPI Global Resources Management, told

Larry Harding, CEO of High Street Partners, an outsourcing provider, says it’s already happening at his firm. While clients strapped for capital had delayed making final decisions on projects for up to six months beginning late last year, they began in the spring to give his company the go-ahead as the economy appeared to brighten. He told that the interest in outsourcing human resources, finance, and accounting work is still going strong as “there’s more of an appetite to outsource anything you can” to keep headcount down.

Scott Gildner, president of TPI North America, is a good deal more bearish, however. Capital-strapped companies are reluctant to jumpstart new projects, particularly mega-deals, whose return on investment is uncertain. “Our clients have limited capital to spend” and no discretionary funds, he notes. What money they do have is being plugged into IT projects that could have a faster return: While total contract values for outsourced tech work slipped to $33.2 billion in the first half of this year, compared to $36.1 billion, it wasn’t a huge drop-off.

On the other hand, the human-resources outsourcing market is going through a “big slowdown,” says Mayo, as many large projects undertaken in the past few years have proven difficult to implement. Outsourced finance-and- accounting has taken a similar significant decline, total contract value falling from $3.8 billion in the first half of ’08 to $400 million this year.