An interesting thing about the market for information technology and business-process outsourcing: it's strong in both good economic times and bad. Except when it isn't.
Confused? Then consider this. At the deepest trough of the current recession, back in late 2008 and the first part of 2009, you would have expected businesses to do everything possible to shed internal costs and resources. Yet the outsourcing market was pretty much in the doldrums during that period. It only started to pick up toward the end of last year, and is now seeing modest growth as the U.S. economy inches toward recovery.
So why didn't companies cast off their non-core processes like so much ballast when their ships were sinking? For one simple reason: they froze at the helm. Unsure about where the economy was going, many executives did nothing. To mix a metaphor, it was a classic "deer in the headlights" situation, says Mark Mayo, partner and president of global operations with TPI (www.tpi.net), the Houston-based firm that collects data and advises companies on sourcing strategies.
TPI's latest Global Index on commercial sourcing contracts (http://www.slideshare.net/TPIIndex/4q09-tpi-index-presentation), covering the fourth quarter of 2009, reports a 47-percent rise in total contract value (TCV) over the previous quarter, and 8 percent over the same period of 2008. It was the market's best performance in six quarters. But that stellar result wasn't enough to overcome a weak market in the first half of 2009. For the full year, TCV was down 13 percent to $74.5bn - its lowest level since 2001, TPI says.
The trend doesn't speak well to the ability of executives to make timely decisions in times of crisis. Even now, portions of the outsourcing market are still showing sluggish activity, in what TPI terms a "slow but steady recovery." Business-process outsourcing, covering such tasks as human resources, accounting and facilities management, is especially problematic. Another recent report on global sourcing trends, this one from the law firm of Morrison & Foerster LLP (www.mofo.com), calls BPO "the poor relation over the past 12 months." Again, one has to ask: if outsourcing relieves companies of non-core competencies, takes overhead off the books and lets outside experts handle certain drudge-like tasks, why isn't it steaming along in this sector of the market?
Mayo has one explanation. He points out that BPO was all the rage in 2004 and 2005, with providers hyping their ability to offer an array of services that integrated multiple corporate functions and took them out of the organization. HR was just one of the areas to be farmed out, in many cases for the first time. It was all supposed to be lumped into one big contract - the proverbial win-win.
Only one problem: the service providers had promised too much. They won the big awards but struggled with execution. Costs proved high and profits low, if non-existent. Then came the recession, and potential clients backed away from making any high-profile decisions that required substantial investments to carry out. Now BPO was reduced to discrete functions based on staff audits and headcounts - easy to outsource, but making a relatively small impact on the marketplace. "All the traditional places for BPO just dried up," says Mayo.
It wasn't until late in the second quarter of 2009 that companies began thinking about more substantial outsourcing opportunities, mostly in the IT arena, Mayo says. The big three industries driving the resurgence were financial services, manufacturing and telecommunications and the media. (No change there - in 2008, those three sectors accounted for 72 percent of outsourcing done on a global basis, Mayo says.) All had seen steep drops in activity at the onset of recession; manufacturing alone accounted for $9.5bn of the market's $11.4bn decline between 2008 and 2009. Thanks to the second-half rally, outsourcing contracts in those areas were actually up 4 percent for all of 2009 - not bad, considering their miserable performance in the early part of the year.
By the way, it should be noted that logistics and other activities related to the supply chain make up a relatively small portion of the overall outsourcing market. Of that $74.5bn in total contract value in 2009, supply chain accounted for just $2.5bn, Mayo says. And even that amount was unusually large, skewed by two big deals that took place during the year - Linfox Logistics (www.linfox.com) winning a 10-year, $1.8bn contract from National Foods Limited, the Australian food and beverage company, and Geodis (www.geodis.com) taking over IBM Global Logistics, in a multi-year deal worth about $1.4bn a year. For a perspective, look at the supply-chain management outsourcing numbers for prior years: $30m in 2008, $200m million in 2007, $390m in 2006 and $450m in 2005.
So what does this all mean for the economy in general? Mayo says there's a connection between renewed outsourcing activity and overall economic health. It signals "stronger confidence by the buying companies. They're feeling a little more comfortable about the whole economic situation as they move forward in a decision process." The initial shock of the Great Recession has worn off, and corporate executives are starting to make the big decisions that will improve their margins and position them for real recovery - the kind where consumers buy more products and people get hired.
It's been a painful two years, Mayo acknowledges, and we're far from the empyrean levels of the mid-2000s. "But I feel positive that we have recovered and the [global outsourcing] market's turned," he says. "I expect it to get better in 2010, and going forward into 2011."
In my next post, I'll look at the market for logistics services outsourcing, and talk about why some companies are balking at this supposed no-brainer.
- Robert J. Bowman, SupplyChainBrain
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