Downturn drives agile outsourcing demands

Outsourcers need to become more agile, and cope with risk of insolvency, during the current economic downturn, according to industry experts.

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Outsourcers will have to be more agile to survive, while organisations employing outsourcers will may need contingency plans for the insolvency of their supplier, industry experts have warned.

Outsourcers will feel the squeeze as firms put more pressure on them for upfront savings and flexible contracts, a conference organised by the National Outsourcing Association heard last week.

Traditional outsourcing deals, based on fixed prices models, "encourage vendors to underbid, and under deliver," according to Gennady Galanter, director of solutions marketing for Exigen Global Services. "Projects continue to run over budget and miss deadlines."

Firms are looking again at their sourcing plans to bring in more flexibility and drive more savings, but also to avoid the risk of failed contract or possible litigation, Galanter said.

"Clients measure value in terms of financial impact, and are looking for new ways to measure risks and vendor performance. A vendor’s rate card alone is not the focus."

"There is a shift in way outsourcing markets work. IT budgets are flat or declining, and there is a need for measuring value," he said.

Tony Adams, senior manager at outsourcing benchmarking company Alsbridge agreed that outsourcing contracts are being changed.

Adams cited research, conducted by Alsbridge a few months ago, that found Europe is now bigger than the Americas in value and number of IT outsourcing deals signed. In 2007 Europe penned 220 major contracts worth £25 billion collectively, and Americas signed 194 contracts, worth £16 billion in total.

"Europe accounted for 36% of all outsourcing deals – both IT outsourcing and business process outsourcing (BPO) - in quarter one," said Adams.

If IT budgets are squeezed, off-shoring activity will accelerate, according to Adams.

In the UK financial sector, three times as many organisations have outsourced compared to offshored. Over 50 percent of financial firms have increased outsourcing in the last five years, but only 6 percent decreased. Yet, only 40 percent are very satisfied with the results of outsourcing IT, while 40 percent are neutral.

As the economy is in decline, companies and outsourcers should be prepared to cope with possible insolvency, Simon White, a lawyer at Morgan Lewis warned.

"What happens if the customer goes belly up? A lot of companies can be technically insolvent, but they aren't pulling the plug," said White.

"In an economic downturn, the biggest issue is dealing with upfront savings. But cash flow is more of an issue for suppliers," he said.