October 7, 2011 6:45 AM

The stability of the IT services sector and the growth of the service providers has come under debate again due to several developments in the macro economic environment. The unemployment rate in the U.S. is more than nine percent, Standard & Poors lowered the sovereign credit rating of the U.S. on August 5 and in Europe, several European economies are in need of bailouts by stronger economies or measures to cut budgets and curb spending for improving their fiscal health.

These events may potentially lead to a slowdown in decision making and postponement of IT projects by companies. The argument is that slower GDP growth in the U.S. and several other economies will cause negative business sentiment, lower consumer confidence and cause a decline in state investments and consumer spending, which impacts businesses’ growth outlook and IT budgets. The largest impact for India heritage providers is feared from the U.S. since it contributes about 60 percent of annual revenues.

In my view, the global ITO and BPO services industry may not be impacted as severely as the recent recession (2008-2009) as companies will react in different ways to the situation. The reaction to the uncertainty in the global economy will probably result in:

1. Companies seeking to further tighten their belts with assistance from service providers to achieve these goals. Low cost global service delivery locations enable service providers to deliver a higher level of services to meet immediate, essential BPO and ITO needs potentially at a higher efficiency and productivity level.
2. Higher level of focus on cost and savings by public sectors across the U.S. and Europe – potential for outsourcing growth for service providers to partner with governments.
3. Accelerated adoption of cloud computing delivery models – among mid-sized businesses with a broader scope of services and large businesses with point requirements.
4. The transformational projects and allocated spending to complete these projects that can be deferred will be deferred, but hopefully will not disappear entirely.

The impact of companies choosing to defer budgets will likely mean slowing growth for the providers in the next few quarters, and it will be increasingly important for Indian-heritage providers. According to the TPI Index – which measures commercial outsourcing contracts valued at US$25 million or more – Indian-heritage providers have won a larger share of the sourcing contracts, increasing their market share in the last decade from one percent of contracts to 26 percent this past quarter. This effect could be partially offset by the growing demand for sourcing services from emerging markets such as India, Southeast Asia, Latin America etc… History also offers evidence that management teams that invest in its company’s future during periods of slower growth or recessionary spells are in a better position to catch the next bull phase.

Overall, I am not as pessimistic about the opportunities for the services sector as some economists and industry analysts might be. I’m also very interested in your view. How do you think this situation will play out for the ITO/BPO industry in the near future?

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TPI is the leader in guiding organizations through effective, lasting transformation of their business support operations. Around the globe we have helped hundreds of clients reduce operating risks, streamline complex operations, improve the cost of support functions, achieve sustainable improvements and make competitive gains. Decisions to change and successful transition of existing operations to new service delivery models is hard — and replete with risks. While the decisions are never formulaic, the hard-earned lessons of hundreds of prior evaluations are invaluable.

Posted by Sue Ansell at October 7, 2011 6:45 AM

Categories: Outsourcing

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