At the beginning of each year, we survey Morrison & Foerster's Global Sourcing Group lawyers in Asia, Europe, and the United States regarding the current state of the world's outsourcing market and emerging trends likely to shape that market over the next twelve months. In this year's update, our lawyers comment on the impact of the economic downturn on outsourcing, identify key business and legal considerations in today's sourcing deals, and highlight new sourcing-related developments in various regions of the world. Our lawyers' views are based on what they have seen in their outsourcing projects during 2008, as well as on the views expressed by service providers, outsourcing consultants, and clients. The following is an executive summary of outsourcing trends:

Global Economic Problems

1. Recession Deepens: For many businesses, outsourcing will remain an attractive response to the on-going recession and the consequent need to reduce expenses. However, as a result of the global credit crunch, deferred investment deals financed by outsourcing service providers are unlikely to be widely available over the coming months.

2. Cost Driven Deals: Although outsourcings driven by cost-saving issues tend to be short-term solutions, such "outsourcing to survive" deals are likely to become the norm in 2009.

3. Do More with Less: Companies are understandably focusing on their existing outsourcing relationships, with some companies concluding that the rationale for outsourcing has evaporated. Many more companies, however, are looking to drive further value and cost improvements in their existing deals, often via re-negotiation of pricing, service levels and other key terms.

4. Financial Services: In the past, financial services companies have fuelled significant growth in outsourcing. This has changed dramatically with the global economic crisis. Most banks are currently focused on maximizing value and rationalizing existing deals, not on new outsourcing activity. On the other hand, look to industries that have been slower to embrace sourcing--such as the retail and entertainment industries - to pick up some of the slack.

5. Effect on Service Providers: Some service providers will not survive the current economic upheaval, while others will thrive. The service providers most likely to survive will be those that have sectoral and geographic diversity, well-managed overheads, and deep, long-term customer relationships. Consolidation in the service provider community may mean less leverage for customers in future negotiations, and the recent high-profile Satyam scandal in the Indian service provider market may prompt a "flight to quality" by outsourcing customers.

Other Global Trends

Data Privacy and Security: The potential impact of a data security breach has never been higher. Outsourcing customers continue to focus extensively on the risk of data loss presented by their service providers. Encryption, secure data transfer, and enhanced loss notification and liability provisions are increasingly common negotiation topics.

Claims and Disputes: As contract margins get tighter and customer tolerances for underperformance shrink, we are already seeing an increase in the number of disputes (including litigation) between outsourcing customers and suppliers. Unless properly handled, such claims and disputes can have a devastating impact on the overall outsourcing relationship.

Green IT: Clean-tech and Green IT initiatives will remain on CIOs' agendas during 2009. In light of the current economic climate, however, the interest of outsourcing customers in more energy-efficient IT solutions will be limited primarily to those solutions that offer cost savings either immediately or in the near future.

China Factor Cushions the Recessionary Effect: The recession has been delayed in reaching Asia, and its overall effect may well be softened by the "China factor." Some observers are projecting that the growth of outsourcing in China may accelerate during 2009; at worst, it will slow only a little.

Growth in Outsourcing Within Asia: Outsourcing within Asia from high-cost to low-cost jurisdictions is set to increase and, because it starts from a relatively low baseline, may have the greatest mid- to long-term growth potential.

Sleeping Giant Dozes Off: The European outsourcing market has slipped back after two years of strong growth. But there is still latent demand, and more scope for first-time outsourcing than in more mature markets such as the UK and U.S.

Data Security and Privacy: Data security and privacy issues remain high on the European agenda--with a resulting impact on trends in Europe-based outsourcing deals.
United States

Moderate Growth and Re-Sourcing: Outsourcing by U.S. companies is expected to continue growing, although more moderately than in recent years. 2009 is shaping up to be the "Year of Re-Sourcing" as firms review their sourcing strategies to deal with the short-term and potential long-term effects of the deepening recession.

U.S. Jobs Policy: The new administration of President Obama has an overt U.S. jobs-creation policy. Combined with organized labor pressure and caps on visas, this could mean more outsourcing solutions biased towards on-shore delivery.

An Outsourcing Rebound: The outsourcing model provides an opportunity for companies emerging from the current economic downturn to choose solutions that are less dependent on raising capital and more based on partnering with others who can provide necessary people, processes and tools in a cost-effective manner.
Morrison & Foerster's Global Sourcing Group