Top 10 outsourcing trends for 2009

Despite the uncertain global economic situation, Tholons, an advisory, investment and research firm for the IT/BPO/KPO industry, maintains that the long term demand for outsourcing will remain unchanged. Though with reduced IT budgets, clients will tend to be more selective and demanding while negotiating service level agreements. This was announced while unveiling the trends in the IT/BPO/KPO sector for 2009. Decreasing margins will push providers to better utilize existing resources, leverage operational levers, implement new technologies efficiently to differentiate themselves and improve service delivery processes. According to Avinash Vashistha, CEO, Tholons, "Service buyers will need to re-assess their outsourcing strategies and implement a better mix of multi-sourcing, nearshore and offshore models, while service providers will look to tap growing domestic markets (such as China, India, Argentina, Brazil and even US) as a means to hedge against the volatility of existing offshore contracts." Following are the top 10 trends that will shape global outsourcing in 2009 says Tholons: -- The worldwide market downturn will impact growth and margins for the first 2-3 quarters of 2009 before picking up and ending the year on a stronger. There will also be a reduction in the number of start-ups in the services sector as the focus shifts on sponsoring hard asset-intensive businesses. Also, most large firms will see a decline in QoQ earnings. -- As Western economies continue to bleed, service providers will shift focus to domestic markets for growth. There is already an increase in focus by vendors towards large and growing domestic markets like India, China, Argentina and Brazil. Fulfillment of customer support and back office services targeted for retail, telcom, and financial services verticals will be amongst the hot spots for providers looking to tap the surging local demand. -- Global economic downturn will lead to increased outsourcing in recession proof industries like healthcare, Legal & education. Other sectors like manufacturing, retail and telecom will have to make a significant shift and reduce cost drastically to survive. These sectors will be attractive industries as they look for opportunities to cut cost. -- Consolidation in the financial sector is inevitable due to the global financial crisis. This will create M&A opportunities which will generate further business for LPO firms. Tholons expect strong growth for LPO firms. The processes will revolve around integration of software applications, data center consolidation and tighter integration of other operational platforms. -- Governments will assume a more crucial role in promoting destinations by developing work force capacity, infrastructure and effective regulatory/ trade policies that are favorable to outsourcing. Cebu City, Shanghai, Beijing, Ho Chi Minh City and Krakow make up the top five spot in the recent Tholons study of Top 50 emerging global outsourcing cities. -- Clients will increase geographic diversity in their service delivery locations as newer service delivery geographies are emerging with niche capabilities. In the coming year, more clients will look for alternatives to India to de-risk their service delivery models that are otherwise geographically limited. Nearshoring as a low cost alternative to domestic sourcing will assume greater importance. In the near-term, the top Indian firms are predicted to expand global footprints and open delivery centers in China, Latin America, Eastern Europe and North America. -- Pricing pressures will result in reduced rates and new measures to achieve cost savings and higher productivity. Client will negotiate hard for every dollar spent, while suppliers will try to protect rates but offer more value added services. Large India-based providers are expected to see EBITDA margins plunge below 20% over the next three years, as they move more IT projects offshore (mostly to India) -- On the M&A front, large deals will slow due to a more tepid market. Challenges related to integration and maintaining liquidity (as opposed to acquisition), will also be primary concerns for 2009. However, firms will continue to look for small tuck-in acquisitions to plug gaps in their portfolios and gain client proximity. Cross-border, inorganic investments are expected to increase in Japan and China with increased market consolidation seeing small to medium players being likely targets.