Continued bullish reports of growth in their pipelines by the world’s largest outsourcing providers may be further evidence the economic storm is waning, according to EquaTerra research. EquaTerra’s customer-facing advisors – whose insight into current buyer activity provides a forward view of demand two to three quarters out – forecast steady demand through the first quarter of the year.

Continued bullish reports of growth in their pipelines by the world’s largest outsourcing providers may be further evidence the economic storm is waning. Over 75 percent of the service providers polled in EquaTerra’s 3Q09 Advisor and Business/IT Service Provider Pulse Survey* reported continued growth in their deal pipeline, up 10 percent from last quarter and an impressive 34 percent rise from the same time last year, the highest levels of pipeline growth cited since 3Q 2005.

"The bulk of outsourcing demand is still defensive, aimed at short-term cost-cutting and cost-containment strategies," said Stan Lepeak, managing director of global research for EquaTerra. "But roughly 10 percent of both EquaTerra advisors and service providers see some buyers are preparing for an upturn with selective investments in new technology."

Key findings from EquaTerra’s 3Q09 Pulse:

• Demand for outsourcing up – Pipeline growth, one of the strongest indicators of market demand, has been increasing by eight to 10 percent per quarter since the first of the year, fueled by the worldwide economic recession. Service providers (75%) continue to cite growth in their new-deal pipeline and over two-thirds of them (68%) predict demand will continue through the end of the year. Forty-eight percent of EquaTerra’s advisors cite growth remains steady, up two percent from last quarter.
• Buyer base growing – The severe economic downturn has made outsourcing more attractive to a broader base of clients, and business process outsourcing is often the lever. EquaTerra advisors report that offshoring is an increasingly compelling option for first-time buyers looking for short-term cost savings with little upfront investment, an approach well suited to the labor arbitrage model.
• Price competitiveness stabilizing – Service providers continue to indicate they are seeing less pricing pressure. The number of service providers citing increased levels of contract re-compete or renegotiations fell for the third straight quarter to 21 percent, indicating buyers are weighing quality against lower cost and/or service providers experiencing their own margin pressures are unwilling to make further cuts.

Insight into Buyer Investments

As in most economic recoveries, investments in information technology are viewed as a way to jumpstart an organization’s growth engine and achieve a head start over competition. In its 3Q09 Pulse, EquaTerra attempted to gauge the market by looking at current buyer investments in three specific areas – application development and maintenance (ADM), remote infrastructure management (RIM) and software as a service (SaaS).

Most organizations suspended new and/or extensive ADM efforts with the onset of the recession, opting for off-the-shelf software or to forego software investments entirely. This trend remains strong though there are scattered reports from large Indian outsource providers that some buyers are beginning to invest in new software development/business technology infrastructure. It is too early to discern whether this modest uptick in discretionary spending is primarily associated with the replacement of inefficient legacy systems or indicative of buyer readiness to deploy new applications/products. More broadly, buyers worldwide continue to invest in commercial enterprise resource planning systems to improve overall process performance, a strategic investment that delivers both short and long-term benefits and can reduce ongoing operations support costs.

EquaTerra finds RIM is perceived as an incremental evolution of IT outsourcing rather than a true new service. Since IT infrastructure outsourcing has usually been managed offsite, the bottom-line question is whether offsite can now become offshore. Most buyers have yet to form an opinion as to whether RIM offers a meaningful way to improve the quality and/or reduce the costs of IT infrastructure services. It is safe to say, however, RIM’s focus on cost will drive further commoditization.

While business has leveraged the Internet for decades, organizations have only recently considered housing business-critical applications online in hosted environments. EquaTerra finds a growing number of organizations are evaluating the benefits of SaaS, a technology shift strongly supported by business unit owners. SaaS’ plug-and-play approach to acquiring new software bypasses compatibility/integration issues, accelerates implementation and eliminates installation headaches. The lease versus buy model is also extremely attractive in the current market. Still, most organizations remain on the sidelines, apparently uncertain whether now is the right time to make the transition.

"It's clear the recession has created new realities and organizations are aware they face challenges that will require new approaches," said Lepeak. "While many buyers are still in a holding pattern, there are indications a vanguard of buyers are beginning to formulate re-emergence strategies."

About EquaTerra's 3Q09 Pulse

EquaTerra combines relevant recent research with trending data gathered through a quarterly survey of leading outsourcing service providers and EquaTerra’s own client-facing advisors to create the quarterly Pulse survey.

For insight into the global outsourcing market and a comprehensive discussion of survey results, register for EquaTerra’s 3Q Pulse Webcast Thursday, October 15, at 11 a.m. (EDT).

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