Demand for business process and information technology outsourcing is still on the rise, with strong prospects for 2009 and beyond. That is the conclusion of a new "Pulse" survey by EquaTerra, the business advisory firm, which polled more than 200 senior executives from 19 industry groups. Looking at activity in the second quarter of 2008, EquaTerra finds demand levels down 12 percent from the previous quarter, but up 8 percent from the same period of 2007. In addition, service providers reported a 10- to 52-percent rise in business process outsourcing (BPO) and tech outsourcing (ITO) deals in the pipeline. Approximately 45 percent of those polled said they expected continued growth in demand, down from 50 percent in the previous quarter. EquaTerra estimates that there were more than 150 outsourcing deals in the second quarter, with an average total contract value of $270m. That compares with 120 deals with an average value of $120m in the first quarter of 2008.
Margin-challenged companies are showing less patience with their outside partners, however. According to EquaTerra, outsourcing programs that promise a short-term return on investment or quick cost savings are going forward, often at a more rapid pace. "Not surprisingly," the firm says, "efforts focused on complex process transformation or that require significant upfront investment are more likely to be slowed or on hold." The Pulse survey suggests that companies are drawn to outsourcing's flexible cost model, as they fend off global competitors and seek to weather the economic downturn. But the nature of outsourcing arrangements is changing as well; no longer does the practice solely involve one-dimensional, point-to-point services. "Services supply chains have steadily become more diverse and more widely distributed, with large organizations forming hundreds of different relationships with hundreds of different service providers worldwide," says Stan Lepeak, managing director of research with EquaTerra.
Outsourcing has proven to be an equally powerful tool in the area of transportation and logistics, but a wave of mergers and acquisitions might be shrinking the pool of providers. A new report by PricewaterhouseCoopers LLP uncovers a rapid rise in large deals in that sector, with a disclosed value of at least $1bn. The 11 large deals announced in the first half of 2008 put the year on pace to exceed both 2006 and 2007. The passenger ground category was responsible for 29 percent of deal value in the first half of this year, while interest in rail and logistics targets also saw increases over the prior two years, PwC says. Logistics companies accounted for 19 percent of total deal value, while rail took up 16 percent. About a third of deal volume during the first half involved financial investors that favored shipping and logistics deals over other market segments, the report finds. The actual number of transportation and logistics deals was down in the first half of this year, due in part to high risk premiums and a drop in debt-market liquidity, according to PwC.
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