Last week we released our Q3 2010 Market Vista research report. Our research shows that the market continues to see steady – but unremarkable – growth since 4Q09, with increased transaction activity in each successive quarter. Amid concerns related to negative sentiment against offshoring in some markets, outsourcing transactions held steady in Q3 2010, leading to cautious optimism regarding the overall health of the industry.
Many in the market want to interpret the modestly increasing overall trends as an indicator of the economic cycle. There is some truth in correlating the slow growth to the broader economic conditions, but what I find most interesting is how the underlying trends are all clearly showing signs of a more mature market and the needs of such a market at this point in time. We provide details of this quarter’s market activity in our 180-page report regarding captive set-ups and divestitures, location trends and costs in leading Asian cities and the service provider space. So, here I’ll comment on ways in which the data points to a maturing market.
The most obvious illustration is the ITO market – Q3 2010 saw a larger share of renewed and restructured deals than during previous quarters, and witnessed signing of a variety of mega deals (total contract value of more than U.S. $1 billion), most of which were renewals. It is logical that renewals would start to form an increasing important part of the contract signings, but these renewals also reflect how the overall market is changing in a couple of key ways: 1) more deals are being broken up into smaller pieces and; 2) new entrants with offshore-centric delivery models are continuing to gain traction in the traditional asset-heavy IT infrastructure space.
Next, let’s look at the captive model. It remains robust with each successive quarter showing consistent new captive set ups and expansions. Leading offshoring adopters are likely to continue growing their captive operations in terms of size, scope and geographies serviced. However, these set-ups are beginning to skew towards smaller centers and with a greater focus on high-value services like R&D, engineering, technical centers of excellence, and other areas that were not part of the “low-hanging fruit” strategy of earlier offshore efforts. This dynamic is a result of two forces characteristic of a maturing offshoring portfolio:
- The offshoring portfolio as whole increasingly impacts and drives incremental captive investment decisions . The first captive or two were fairly obvious decisions in terms of looking for locations to satisfy basic skill requirements at low cost and manageable risk. Additional captive investments are generally smaller in scale but based on a more complicated set of criteria such as: 1) ability to provide access to new skills while also providing diversification options for existing centers; 2) tapping new and less mature geographies but in a way that does not increase overall risk; and 3) developing centers of excellence for specific functions or services (e.g., product development, F&A)
- Increasing focus on building an offshore portfolio to support a broader portion of the business. As organizations optimize their internal delivery for offshore services, they realize the benefits of scale and are increasingly trying to ensure centers are leveraged by multiple business units .
This trend toward specialized centers of excellence is likely to be more pronounced for manufacturing and technology companies than for other vertical industries. While a few divestitures of captives will occur, they are likely to be selective and made to optimize the global sourcing portfolio of parent organizations.
From a location perspective, key offshore geographies such as India and Philippines have started to witness increasing competition for talent in recent quarters. Compared to the same period in 2009, attrition rates are up 5-10 percentage points as service providers resume hiring at meaningful volumes. From a geography perspective, activity is spreading to new markets in Africa and South-east Asia, led by the more aggressive adopters.
Yes, things in the outsourcing industry are ebbing, flowing and morphing due to a variety of factors. But in comparison to last year, the size of the market has certainly grown, and in today’s challenging business environment, similar quarter-on -uarter transaction levels are all we can reasonably expect.
Join us on the Market Vista Q3-2010: Key Market Developments Webinar for detailed discussion on trends in this quarter. The webinar will also feature a discussion with Atul Kunwar, President, Mahindra Satyam, on management priorities as Mahindra Satyam looks to capture growth and market share post announcement of restated financials.