Times of Unrest Result in Safe Bets

Today's blog comes from Peter Allen, Partner and Managing Director, TPI

In today’s 3Q08 TPI Index we reported that the third quarter delivered significant softness in commercial outsourcing contract awards – not entirely unusual for third quarter results, especially when those third quarters follow quarters of unusual strength, as did 3Q08. Yet, in the face of the unrest in the global financial markets, this report is significant for what it might foretell for the coming quarters. (To download the complete TPI Index findings, visit: http://www.tpi.net/knowledgecenter/tpiindex/)

The softness in outsourcing contract awards comes at a time when the instability of the world’s financial markets is top-of-mind for most of us. And, looking at the record for the Financial Services industry, which has been the preeminent buyer of outsourced services for as long as records have been kept, we see that uncertainty has continued to impact the deal flow.

Softness in the global Financial Services industry’s use of outsourcing, which started late last year, was a definite contributor to the third quarter’s soft market activity. And we have yet to see the full impact. That’s because the TPI Index metrics for Q3 and 2008 YTD, represent the results of outsourcing initiatives begun in more “stable” times. The uncertainty and unrest of today’s global economic climate has yet to show up in our measurements of the outsourcing segment focused on the Financial Services industry. Those tallies are ahead of us.

So, in such a climate, what’s in store for the big picture of outsourcing?

Prolonged uncertainty and distractions in Financial Services institutions is likely to dampen or delay decision making about outsourcing in that industry in the coming quarters, but whether it will spread to other industry sectors is difficult to predict. We know of several larger transactions in the works that should come to award in Q4. In that light, we don’t expect Q3’s relatively low levels of TCV to be repeated next quarter.

I certainly expect that as a result of the financial turmoil, the outsourcing industry will need to flex with changing buyer circumstances and demands.

Projects with clear cost-reduction implications are likely to continue, even among troubled companies, and smaller, tactical (rather than large scale, transformational) outsourcing engagements will provide service providers’ bread and butter for the near term. 

At the same time, corporate decision-makers throughout industries are exhibiting anxiety and concern about tightening credit and, as a result, are choosing to defer discretionary spending until they feel they have greater clarity into the full extent of our global economic state.

Until then, service providers will probably see their sales cycles lengthen. They may also see rationalization of their responsibilities in multi-sourced relationships as their clients look to simplify and streamline their services relationships. Providers most certainly will not be able to command higher prices from clients. And, of course, the wave of mergers and failures in the Financial Services industry has left a smaller number of firms within that sector to which providers can sell their services.  

There will even be a fair amount or “realignment” of back-office and transaction assets as clients look to divest themselves of any operations that are considered “stranded” in the grand scheme of efficiency. Service providers with strong balance sheets may be best positioned to acquire these operations and, in turn, gain big new clients.

In my opinion, once the uncertainty subsides, outsourcing will become a viable and welcome option. In the end, I believe that outsourcing relationships will be called upon to achieve near-term cost reductions, facilitate restructuring of the industry and ultimately provide for growth at the back end of the downturn.