BPO and IT Outsourcing Demand Slides in Q406

According to a press release from EquaTerra, the 46% demand level posted for Q4 represents a decrease from Q3 of 2006 and Q4 of 2005.

“The drivers behind this finding are continued BPO supplier capacity constraint, comparisons to historically high levels of demand, more multi-sourcing leading to – in some cases – smaller, less visible deals, and more prudent, sophisticated and selective buyers,” Stan Lepeak, EquaTerra’s managing director of research, said in the release.

The survey results also show that buyers, service providers and outsourcing advisers alike view outsourcing contract renegotiations, recompetes and restructurings, in most cases, as a catalyst and opportunity for improving the deal, and not a sign of a deal that went sour, according to the survey. In fact, on a scale of 1-5, EquaTerra advisers cited a high likelihood that incumbent service providers will retain the majority of the original business when an outsourcing contract is being renegotiated.

Other key findings in the 4Q06 Pulse Surveys include:

• Outsourcing of non-traditional functions such as document and imaging services, legal processing, “knowledge process” outsourcing, and logistics services is on the rise.
• A continuing increase in multi-provider sourcing that can benefit buyers if it allows them to engage the best service providers for each of the processes being outsourced, but can also be more complicated and expensive to manage than sole sourcing
• Most buyers continue to underestimate the cost and complexity associated with performing Outsourcing Management and Governance (OM/G) activities and shortcomings in the staffing of the governance organization; costs associated with the use of third-party services such as lawyers, advisers and benchmarking firms and the costs for software tools to support OM/G efforts are often one of the root causes for problems with outsourcing transitions and dissatisfaction with ongoing outsourcing.