Outlook 2010: Slow Start,

Great Prospects
Sluggish demand for new scope projects, continued emphasis on cost reduction , large contract
restructurings, and a wobbly macroeconomic situation in Europe are impeding full recovery of
the outsourcing market. But cloud-based services, a promising mid-market, and healthcare

by Ed Nair

T he first quarter of 2010 indicated a 25 per-

cent growth in total contract value compared
to the same quarter last year. According to
1Q10 Global TPI Index, which measures commercial
outsourcing contracts valued at $25 m and more,
al value of about $12 B are due to expire in 2010.
These contracts would get restructured in 2010.
When contracts come up for restructuring, com-
panies look at breaking up the scope to include a
few new vendors. Many of the Indian vendors are
the total value of such contracts stood at $19.5 B. reaping benefits here because when these contracts
The story behind the quarter performance is inter- were signed, typically five to seven years back, the
esting: 42 percent of the contracts were renewals of global outsourcing vendors like IBM and Accenture
contracts that got expired or came up measured up better in terms of
for renegotiation. This is an unusually capabilities. Over time, the In-
high number according to TPI experts. On the BPO front, dian vendors have matured both
Said Mark Mayo, Partner & President, in capabilities and in scale and
TPI, “The previous record for this was companies have are competitive in pricing. This
29% and it happened way back in 2006. explains the anomaly between
We didn’t expect this number to be so changed tracks and the recent quarter performance
high for 1Q2010.” One reason for this of large global vendors and the
is that many of these were contracts instead of going for India-based vendors. IBM and Ac-
that were supposed to be signed in centure reported sluggish results
the previous quarter, but were pushed large multi-tower whereas TCS, Infosys, and Cogni-
out into this one. Consequently, ‘new
scope’ contracts fell by 15 percent.
deals, they are zant amongst others had far bet-
ter performance and outlook.
looking for well- Companies have not exactly
First Quarter and Beyond started opening their purses wide
Delving deeper into the quarter’s per- defined projects and cost reduction continues to
formance, it bears out that ITO domi- be the dominant agenda in 2010.
nated the story: application develop- that are smaller in This works well in generating de-
ment and maintenance (ADM) and mand for cheaper India-based ap-
ADM combined with infrastructure scope and shorter in plication outsourcing companies.
services contributed the major share to On the BPO front, companies have
the total contract value. In fact, three duration changed tracks and instead of go-
out of the four megadeals (deals over ing for large multi-tower deals,
100M) were ITO. For the Americas, the quarter was they are looking for well-defined projects that are
a coup with 47 percent of the deals, which made smaller in scope and shorter in duration. Says Mark,
it the best quarter since 2006. That said, it was the “Companies are taking a step back and rethinking
manufacturing, travel, transportation and hospital- the way BPO work is handled. Instead of going to
ity verticals that lifted up the performance, unlike one major player they are looking for a small group
usual suspects like financial services and telecom. of preferred suppliers. This is very much unlike
The rest of 2010 has got quite a few contracts when companies signed up large multi-tower BPO
that would come up for renewal but Mark does deals.” Overall, BPO remained slow as clients post-
not expect the proportion to be as high as in this poned transformational deals.
quarter. Mark estimates that contracts with annu- Europe, led by UK, has been an important mar-

10 GlobalServices www. globalservicesmedia.com GS100-2010


ket for outsourcing services. While the action is
shifting away from UK to continental Europe, re-
cent reports suggest that in the short term Europe
would dampen the overall outlook for the industry.
Companies like Cognizant and Tech Mahindra have
already reported weakness in Europe in the current
quarter. Recent incidents like the bailout of Greece,
risks associated with other European economies,
and other macroeconomic factors pose an addition-
al risk to companies (like Accenture, Infosys, CSC,
etc.) who have a substantial footprint in Europe.
Overall, the recovery of the outsourcing market
is slow. Mark says,”It is going to continue to come-
back slowly, in fits and starts, a bit of ITO here, a bit
of BPO there. Definitely, it is not a year of bounc-
ing back.”
Opportunities
In a survey conducted jointly by Global Services,
Horses for Sources, and SSON, in January 2010 re-
garding the outlook of the industry, the key points
that emerged were:
4 Key areas of increased outsourcing scope are
expected to be in areas with heavy low-cost la-
bor arbitrage support (nearshore and offshore)
–software applications, call center, engineering
management, finance & accounting, analytics
and human resources
4 The middle-market ($750m-$3000m)is poised to
GS100-2010 www. globalservicesmedia.com GlobalServices 11
Special Report
be the most active
4 Main drivers are cost reduction, desire to global-
ize business operations and to transform / re-en-
gineer business processes
4 Inhibitors are other priorities brought on by the
economic crisis and internal politics / resistance
to change
4 Customer-willingness to evaluate cloud-based
“business utility” offerings is strong as they in-
creasingly look at hybrid IT/BPO solutions
4 Strong signs of increased adoption of industry-
specific BPO solutions, most notably in the Fi-
nancial Services and Life Sciences sectors
Going forward, one would expect to see large
deals being broken down into deals of smaller
scopes. This would directly affect the large vendors
like IBM and Accenture but their losses would be
gained over by some of the larger Indian vendors.
The impact of cloud computing and cloud-based
services is an essential conversation these days
in every IT deal and in some BPO deals. It would
translate into real market opportunities during the
rest of the year.
This year should be remembered more for
Obama’s historic healthcare bill and less for BP’s oil
spill. The former holds great opportunity both for
IT as well as BPO for many years to come and 2010
would be the year when vendors would start attack-
ing the tip of the healthcare iceberg. GS