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Information technology and business outsourcing are also alive and well. IBM, for one, saw a 20-percent rise in outsourcing contracts in the fourth quarter, and seems bullish on its prospects for 2009. According to the law firm of Morrison & Foerster, "the recession appears to be giving a boost to IT and business outsourcing, particularly as a means to cut core operating expenses." But businesses aren't rushing blindly into outsourcing deals. The firm's third annual review of global sourcing trends sees a heavy emphasis on cost reduction, especially with regard to current arrangements. Expect a push by buyers to do more with less. "Many companies are looking to drive further value and cost improvements on existing deals, often via renegotiation, service levels and other key terms," Morrison says, adding that the trend could make for a strong buyer's market.
Morrison does expect a slowdown in new sourcing activity by financial service firms, which up to now have been a major source of growth in that area. They, too, will be putting more pressure on the cost structure of deals. Meanwhile, the report predicts, there will be a shakeout among service providers. The survivors will be those "that have sector and geographic diversity, well-managed overheads and deep, long-term customer relationships." Industry consolidation also means less negotiating leverage for customers.
Buyers of outsourced services will place a stronger focus on risk and liability management, addressing privacy protection within existing contracts. "The potential impact of a data security breach has never been higher," Morrison says. The issue of industry fraud has also risen to the forefront. The recent financial scandal at India's Satyam Computer Services Ltd. will cause a "flight to quality" by nervous sourcing customers, "with an attendant surge in due diligence," says Morrison. At the same time, the firm expects to see a rise in litigation and other types of contractual disputes, as buyers of outsourced services become stricter about enforcing liability claims.
As Economy Slumps, ISM Finds Capital Expenditure Belt Tightening Among Its Membership
Senior level supply chain managers won't be surprised by the findings of a recent survey conducted by the Institute for Supply Management (ISM). Seventy-seven percent of the respondents said their organizations planned reductions in capital spending in 2009. Of those companies, 35 percent said the drop would be substantial, while 42 percent expect slight reductions. Reasons cited were varied, yet all were connected in some way to current economic conditions. Of those anticipating budget cuts, 79 percent of executives blamed one or more of five factors: worsening sales prospects, economic uncertainty, the high cost of financing, difficulties in obtaining financing, and the high cost of inputs.
More than 42 percent of ISM members surveyed reported plans to reduce production capacity. More than 90 percent of those companies expect the reduction to be temporary; the rest see permanent cuts. Reduced demand for products and services was the number-one factor cited in prompting those decisions.
The survey was conducted in late November and early December 2008, the onset of the current crisis. ISM received 304 completed responses from its membership. Fifty-seven percent named manufacturing as their primary line of business, the group said.
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