Outsourcing: A buyers’ market for now
August 30, 2009
If you are a buyer, the economic downturn has turned the real estate, automotive and just about every other market, including the market for outsourced services, into buyers’ market. In fact, CFO.com recently pointed out that when it comes to negotiating outsourcing contracts, customers are clearly in the driver’s seat given the numbers of delayed outsourcing projects there are due to the uncertain economy. Moreover, many firms providing IT outsourcing services have already taken a hit from the the consolidation on Wall Street. And after the Satyam accounting scandal hit, they took another hit when customers became more aggressive when negotiating outsourcing contracts.
In fact and right after the Satyam scandal began to unfold, CFO.com had quoted an A.T. Kearney whitepaper’s findings that outsourcing vendors were willing to cut as much as 10% to 15% off existing contracts in order to keep their customers. However, customers also had more pressing priorities (with survival being among them) than to take a serious look at reviewing their outsourcing strategies or to consider adding or moving to another low cost destination. Hence, shaving a few percentage points off an outsourcing contract became a quick way to conserve badly needed cash.
Moreover, given the Satyam scandal as well as the events in Mumbai, customers are becoming risk adverse. Hence, they are increasingly seeking to implement a multisourcing strategy that spreads the risk out over multiple locations and vendors. In addition, outsourcing customers now prefer better known vendors with proven track records who, at least in theory, should have tighter security controls. Thus, and while cost is still an important decision making criteria – customers are also considering the possibility that taking on to much risk is not worth the cost savings and potential nightmares should something go very wrong.
Meanwhile, outsourcing vendors are also looking for ways to counteract the slowdown through diversifying their operations, expanding their client base and putting less reliance on just one industry. In addition, outsourcing vendors are also more open to dealing with customers that are new and unfamiliar to them while one Chinese IT outsourcing vendor (Freeborders Inc.) even went so far as to advertise a “zero cost transition” deal for any customer who wanted to switch from Satyam to using their services.
Nevertheless, the question remains as to just how long the buyers’ market for outsourcing services will last for. And while nobody can provide a definitive answer, CFO.com quotes the president of TPI Global Resources Management as saying that there is a tremendous pent up demand for BPO services. Hence, it may only be a matter of time before the dam will break and release a torrent of demand in the form of new contracts and thus end the buyers’ market.
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Outsource vendors must provide innovative outsource solutions. If they provide commodity outsource solutions then they cannot ask for premium price and they may not exist before the end of the recession