equaterra whitepaper 1q09 sp pulse survey results apr2009 3122

8/14/2019 EquaTerra Whitepaper 1Q09 SP Pulse Survey Results Apr2009 3122

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Copyright EquaTerra 2009. All rights are reserved. EquaTerra Advisor and Service Provider Pulse Survey Results - 1Q09 - Page 2

BPO and ITO market demand growth improved in 1Q09

according to EquaTerra advisors and third-party business

and IT service providers polled. Signs indicate this trend

will continue during the rest of 2009. Pent-up buyer

demand created but not consummated in the second

half of 2008 is now making it to market. Uncertain

market conditions and turmoil within individual buyer

accounts will continue to slow or stop some sourcing

efforts, albeit less frequently.

The market for more discretionary third-party services,

such as consulting, systems integration and some

application development work, is weaker than foroutsourcing. The exception is in the public sector and

military/aerospace markets where demand for all types

of third-party business, mission support and IT services

remains strong. U.S. public sector demand for third-

party services continues to grow, driven in part by

stimulus fund inows.

Market conditions overall are driving more demand for

outsourcing, but the nature of the demand continues

to change. Buyers are increasing pricing pressure on

service providers and are demanding more upfrontand clearly dened costs savings. The deal sizes are

smaller and there is a strong focus on cost savings and

cost avoidance. Pricing pressure varies based on the

quality and desirability of both the buyer and the service

provider.

Market conditions are causing some buyers to push to

open up existing deals for better pricing and other terms

and conditions. Buyers for the most part are not pulling

back from existing outsourcing efforts, global sourcing

or the use of offshore-based service providers.

Global sourcing efforts will face more scrutiny in 2009

given market events (e.g., terrorist attacks in India,

Satyam implosion and local unemployment trends), but

will continue to grow. Buyers will increase focus and

improve abilities to address and account for risk in global

sourcing efforts.

Buyers in 2009 will migrate and consolidate third-party

service work to larger and more established providers

in a ight to quality, but also to gain economies of scale

and preferred pricing, terms and conditions. Leading

service providers will remain selective in the clients

and the business they pursue while tier two and below

providers will scramble for whatever business they can

get.

Market conditions are negatively impacting buyer

abilities to perform outsourcing governance tasks as

resources are cut and attention is focused elsewhere

in the organization. This is dangerous given the key

role outsourcing governance efforts play in enabling

outsourcing success and satisfaction.

Service provider capacity for deal pursuit is improving,

though this is largely a function of more service provider

selectivity and discretion around the deals and clients

they choose to pursue. Service provider capacity for deal

transition and delivery also is improving.

EquaTerra offers the following conclusions from the 1Q09 Pulse survey:

Distribution of the EquaTerra Pulse survey reports, controlled by EquaTerra, is intended for internal use and select delivery to

EquaTerra clients, prospects and other marketplace representatives. Questions or comments regarding these surveys should be

directed to Stan Lepeak, Managing Director of EquaTerra and EquaSiis Global Research, +1 203 458 0677.


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Table of Contents

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. EquaTerra Advisor Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4III. BPO/ITO Service Provider Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

IV. Market Demand and Market Trends Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Figure 1 - Advisors: Market Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Figure 2 - Advisors: Demand by Service Del ivery Model . . . . . . . . . . . . . . . . . . . . . .7

Figure 3 - Advisors: Change in Demand by Service Delivery Model . . . . . . . . . . . . . .7

Figure 4 - Service Providers: New Deal Pipeline Project ions . . . . . . . . . . . . . . . . . . . .8

Figure 5 - Service Providers: Demand Next Quarter . . . . . . . . . . . . . . . . . . . . . . . . . .9

Figure 6 - Weighted Aggregate Market Demand: Advisors & Service Providers. . . . . 9

V. Economys Impact on Outsourcing Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Figure 7 - Economic Environments Impact on Outsourcing . . . . . . . . . . . . . . . . . .11

VI. Service Provider Responsiveness to Changing Buyer Needs . . . . . . . . . . . . . . . . . . . . . .12

VII. Market Conditions: Impact on New Deals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Figure 8 - Market Conditions: Impact on New Deals . . . . . . . . . . . . . . . . . . . . . . . . 12VIII. Demand Trends by Functional Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Figure 9 - Adv isors: Demand by Functional Area . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Figure 10 - Service Providers: Demand by Functional Area .. . . . . . . . . . . . . . . . . .14

IX. Advisors:Functional and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

X. Service Prov iders:Funct iona l and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . .15

XI. Demand Trends by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Figure 11 - Advisors: Demand by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Figure 12 - Service P rov iders: Demand by Industry . . . . . . . . . . . . . . . . . . . . . . . . .16

XII. Sales Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Figure 13 - Service Providers: Sales Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

XIII. Pricing Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Figure 14 - Service Providers: Pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

XIV. Deal Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Figure 15 - Service Providers: Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

XV. Service Providers: Contract Protability and Ability to Increase Scope . . . . . . . . . . . . . .20

Figure 16 - Service P rov iders: Contract Protabilit y . . . . . . . . . . . . . . . . . . . . . . . . .21

Figure 17 - Service Providers: Abili ty on Increase Scope . . . . . . . . . . . . . . . . . . . . . .22

XVI. Service Provider Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Figure 18 - Advisors: Service Provider Capacity Overa ll . . . . . . . . . . . . . . . . . . . . . .23

Figure 19 - Advisors: Serv ice Provider Capacity, Pursuit . . . . . . . . . . . . . . . . . . . . . .23

Figure 20 - Advisors: Service Provider Capacity, Del ivery . . . . . . . . . . . . . . . . . . . . .23

Figure 21 - Service Provider Capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

XVII. Update on Existing Deal Structures and Outsourcing Governance . . . . . . . . . . . . . . . .26

Figure 22 - Market Conditions: Impact on Existing Deals . . . . . . . . . . . . . . . . . . . . .27

Figure 23 - Market Conditions: Impact on Outsourcing Governance (1) . . . . . . . . .28

Figure 24 - Market Conditions: Impact on Outsourcing Governance (2) . . . . . . . . .28

Figure 25 - Sample #1 from EquaTerra EuropeanITO Service Provider Performance and Satisfaction Study . . . . . . . . . . .29

XVIII. Service Provider Market Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Figure 26 - Sample #2 from EquaTerra European

ITO Service Provider Performance and Satisfaction Study . . . . . . . . . . .30

XIX. Deal Snapshot . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

XX. Service Providers: Cur rent Deal Port folio Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Figure 27 - Service Provider Re-competes and Renegotiat ions . . . . . . . . . . . . . . . .32

Figure 28 - Service Provider cancellat ions and now-renewals . . . . . . . . . . . . . . . . .33

Figure 29 - Ser vice Provider problem contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

XXI. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

XXII. Appendix - Key Questions by Advisors

Primary Geography and Outsourcing Focus Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35


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EquaTerra Advisor Highlights

Overall BPO/ITO Market Demand Rebounded; 49 percent of advisors cite increased demand, up 11 percent quarter overquarter (Q/Q) but down 4 percent year over year (Y/Y); stronger in both ITO and BPO

Economys Impact on OutsourcingFifty-one percent say the economy is driving more outsourcing while 44 percent (down six

percent Q/Q) indicate economics are slowing deal ow

Market Conditions: Impact on New Deals

Driving emphasis on

Cost savings

Short term ROI

Smaller scope deals

Service Provider Capacity Pursuit Steady Q/Q with constrained levels at 29 percent; improved Y/Y

Service Provider Capacity Delivery Improved; 22 percent cite adequate levels, up 10 percent Y/Y, 29 percent constrained

Market Conditions: Impact on Existing Deals

Driving buyers to

Open deals to get better pricing

Scrutinize deal governance and supplier risk

Overhaul outsourcing governance

Market Conditions: Impact on Outsourcing

Governance

Causing

Uncertainty that complicates renewals

Cuts to retained organization and outsourcing governance efforts

Distracting management from supporting outsourcing governance

Leading Market Segments

ITO1.

FAO2.

HRO3.

Leading HRO Segments

Payroll1.

HRIT2.

Benets3.

Leading FAO Segments

AP1.

AR/C&C2.

General Accounting3.

Leading ITO Segments

ADM1.

Infrastructure/Operations2.

Desktop Services3.

Leading Procurement Segments

AP1.

Strategic Sourcing2.

Order Management3.

Leading Industries

Energy/Utilities1.

Banking/Financial Services2.

Public Sector3.

Market appetite for third-party business and IT services, primarily outsourcing, improved in 1Q09. This was driven by pent-up

demand from the end of 2008 and a stark recognition that dealing with negative global economic conditions requires drastic

action to reduce costs and overhaul operating models. These conditions will continue to drive outsourcing demand in the

second half of 2009 and into 2010 though turbulent market and buyer events still will disrupt deal ow.


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BPO/ITO Service Provider Highlights

New Deal Pipeline Growth Jumped up; 57 percent of service providers cite growth, up 26 percent Q/Q and 14percent Y/Y

Demand Next Quarter Improved; 62 percent expect increases, up 9 percent Q/Q and 12 percent Y/Y

Economys Impact on OutsourcingThirty-eight percent say the economic climate is driving more outsourcing, no change

Y/Y; 57 percent indicate buyers are slowing/ rethinking outsourcing


Driving emphasis on

Cost savings

Adding new business with current service providers

Smaller scope deals


Driving buyers to

Scrutinize deal governance and supplier risk

Open deals to get better pricingOpen deals for other terms/conditions

Market Conditions: Impact on Outsourcing

Governance

Causing

Management distraction from supporting outsourcing governance

Uncertainty that complicates renewals

Cuts to outsourcing governance efforts

Sales CycleThirty-three percent cite lengthening, unchanged Q/Q but up 24 percent Y/Y; 57 percent

see no change

Pricing CompetitivenessMuch more aggressive; 76 percent cite more competitive pricing, up 32 percent Q/Q and

41 percent Y/Y; nearly 2X average

Deal Scope Unchanged; 29 percent cite increases; 19 percent cite declines

Contract ProtabilityStable; 70 percent cite no change; just 20 percent cite improvement, well below average

of 38 percent

Ability to Increase Current Contract Scope Improved; 85 percent expect increases, up 24 percent Q/Q and 33 percent Y/Y

Service Provider CapacityImproved; 43 percent cite adequate levels, up 10 percent Q/Q but down 21 percent Y/Y,

while just 14 percent cite restric tions

Leading Market SegmentsFAO, ITO1.

HRO2.Leading ITO Segments

ADM1.

Infrastructure/Operations2.

Desktop, Packaged App Svcs.3.

Leading HRO SegmentsPayroll, Benets1.

HRIT2.Leading Procurement Segments

AP, Order Management1.

Strategic Sourcing2.

Leading FAO SegmentsAP, AR/C&C1.

General Accounting2.Leading Industries

Banking/Financial Services1.

Manufacturing2.

CPG, Energy/Utilities3.

Business and IT service providers polled indicated that demand and pipeline growth improved in the rst quarter. Demand

remains stronger for outsourcing than for more discretionary and project-based services. Providers are being forced to deal

with more aggressive pricing demands from buyers and strong emphasis on cost savings and short- term, realistic ROI, though

pressures vary signicantly across buyer accounts. Ongoing supplier rationalization creates opportunities for leaders to gain

market share.


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Market Demand and Market Trends Update

Change in demand growth for business process outsourcing (BPO) and IT

outsourcing (ITO), as well as other business processes and IT services, improved in the

rst quarter of 2009 according to EquaTerra advisors polled (see Figure 1)1.

Forty-nine percent of advisors indicated that overall third-party business and

IT service demand levels were up in the quarter up 11 percent from 4Q08, but

down three percent from 1Q09 levels. This level is also below the average 54

percent up rating over the life of the survey.

Just 10 percent of advisors indicated demand levels had declined in the

quarter, above the survey average of six percent but down three percent from

last quarter.

Advisors supporting work in Europe were somewhat less positive on overalldemand growth than those in the Americas. Advisors supporting global

deals were the most optimistic about demand. Please see the appendix for a

complete breakdown of response levels by geography and type of service work

supported.

Advisors: Market Demand

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Down Flat Up Aggregate

Figure 1

EquaTerra added two new questions to the 1Q09 advisor Pulse survey to better

prole the overall market demand for third-party business and IT services. The rst

(see Figure 2) assessed the greatest demand level areas across BPO, ITO, other types

of third-party IT services (e.g., consulting, systems integration, project based work)

and internal process improvement efforts (i.e., deploying expanded shared service

of offshore captive operations). The second new question (see Figure 3) assessed the

change in demand for these service delivery models compared to the prior quarter.

1 The aggregate market demand and pipeline levels illustrated in Figures 1-3 are based on a

calculation of the down, at and up responses to each question and depict a combined

or aggregate total of each quarters response levels.


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ITO was cited as the strongest area of demand across the four service delivery

categories by 59 percent of advisors, followed by BPO at 22 percent.

The greatest increase in demand was cited for internal transformation and

improvement efforts by 60 percent of advisors. Fifty-six percent of advisors

indicated that the demand for ITO grew quarter over quarter. Just 21 percent

of advisors cited an increase in demand for non-ITO third-party IT services,

which are often viewed by buyers as more discretionary or easier to cut back

because they are delivered via shorter term projects.

Advisors: Demand by Service Delivery Model

5%

7%

15%

22%

59%

Other

Other IT Svcs

Internal Imp.

BPO

ITO

Figure 2

Advisors: Change in Demand by Service Delivery Model

49%56%

21%

60%

39%

35%

62%

34%

12% 9%17%

6%

BPO ITO Other IT Svcs Internal Imp.

Down

Flat

Up

Figure 3

The increased demand for internal transformation efforts shows that organizations

more often are addressing problems themselves today instead of bringing in

external resources. It is also a function buyers need in order to prepare processes

for outsourcing prior to transitioning them to providers. Typically, this approach is

more common in organizations less prone to outsourcing, such as those in the public

sector.


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The acute need to reduce costs and overhaul operating models will continue to drive

more outsourcing deal ow into the market. This will become more visible via deals

closing in the second half of 2009, though EquaTerra did see an uptick in closings inMarch compared to prior months. Demand for other types of third-party services,

like unbundled consulting and more discretionary application development work, will

remain weak throughout 2009. Protectionist trade policies, anti-outsourcing rhetoric,

and anti-globalization efforts with continue to grow in most western markets but

will have limited impact on overall outsourcing levels, though specic measures will

complicate some specic buyers sourcing agendas.

Service providers polled were positive regarding new deal pipeline growth

projections (see Figure 4).

Fifty-seven percent of service providers polled cited pipeline growth in the

quarter. Up 26 percent quarter over quarter and 14 percent year over year, thislevel was in line with the sur vey average.

Just ve percent of service providers cited a decline in pipeline growth.

Service Providers: New Deal Pipeline Projections

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Down Q/Q About the same Up Q/Q Aggregate

Figure 4

There are no major variations on pipeline growth assessments based on the prole

of the service providers polled. Results are more a function of specic service

provider situations and their existing market traction and capacity levels, rather than

functional outsourcing areas served.

Service providers were optimistic about future outsourcing demand growth (see

Figure 5).

Sixty-two percent of service providers polled expect an increase in demand

next quarter, up nine percent from last quarter and 12 percent from 1Q08.

No service providers expected demand levels to decline next quarter.

Please note this question is a measure of change in demand growth quarter over

quarter, not absolute demand levels.


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Service Providers: Demand Next Quarter

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


D ecrease Flat In crease Aggregate

Figure 5

The nal chart in this section (see Figure 6) highlights general demand trending

over the past 17 quarters. The weighted average is based on response levels from

both advisors and service providers for each quarter. Any aggregate totals above

the line indicate overall market growth, while totals below the line indicate market

contraction.

Weighted Aggregate Market Demand: Advisors & Service Providers


Advisors Service Providers

Market Growth

Market Contraction

Figure 6


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Economys Impact on Outsourcing Demand

As these survey results are being published, the global economy is nally showing

some signs of having hit bottom in some areas and signals of recovery in others.

Current economic conditions challenge organizations in many ways:

Cash ow is tight and being managed very closely.

Many investments and capital expenditures are being deferred or cancelled if

at all possible even in organizations that can still afford them.

Access to capital and credit remains constrained, constricting the overall

funding pool available for investments.

Organizations are looking for ways to reduce costs, defer future investments

and better map costs to their shrunken top lines.

Organizations are demanding short-term and realistic ROI models on any new

initiatives.

Buying and decision-making processes are complicated and delayed by larger

corporate and market events, negatively impacting deal ow.

EquaTerra has polled advisors and service providers over the past ve quarters as to

how current economic conditions are impacting outsourcing demand levels (see

Figure 7).

The combined response levels for advisors and service providers show that 45

percent felt market conditions are driving more outsourcing. This level wasdown 13 percent from last quarter. Advisors were more likely than ser vice

providers, by a total of 13 percent, to indicate the economy was driving more

outsourcing.

Fifty-one percent overall indicated economic conditions are causing buyers

to slow or rethink outsourcing decisions. Buyers more often are deferring, not

cancelling, outsourcing initiatives. The deferrals typically are caused by other

events occurring in the buyer organizations that have impacted the sourcing

process, rather than by buyers changing their minds about outsourcing.

Advisors in the Americas were more likely than those in Europe to indicate the

economy was driving more outsourcing.


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Economic Environments Impact on Outsourcing

47%

58%

42% 42% 45%

22%

24%

38%

54% 51%

32%

18%20%

4% 5%

1Q08 2Q08 3Q08 4Q08 1Q09

Little/no impact

Slowing/rethinking outsourcing plans

Driving more outsourcing

Figure 7

EquaTerra sees that pent-up outsourcing demand created in the second half of

2008 is now starting to ow faster into the market. Buyers can no longer wait to

signicantly respond to bad economic conditions. Change, often radical, is required

to realign costs and operating models to market realities. EquaTerra increasingly is

seeing buyers use troubled times as a motivator to pursue aggressive change efforts

they were too timid or distracted to undertake when times were good. There is a

strong desire to make the deep cuts and major changes to service delivery models

that are required to fundamentally change operating models to better compete with

more aggressive global competition. As one advisor noted, I see outsourcing plans

being investigated under the current cost pressure that would never have even

been discussed in a normal economic climate.

Advisors offered the following additional comments on how the current economy is

impacting outsourcing and third-party service usage:

Everyone is looking for value. The faster the speed to value the better.

Signicant transformation in terms of dollars needed is being highly

scrutinized as to whether its a want or a need.

In some respects it has paralyzed decision making. Companies that are in

serious trouble are having a hard time af fording help. Those that can afford

help are a bit paralyzed. But it looks like things are star ting to break loose.

And the service providers are becoming more predatory.

Service providers added these comments on how the economy is impacting market

demand:

We saw deals in our pipeline slow down considerably in the second half of

last year. Some of those deals are now getting done. And were seeing new

deals come into the pipeline now, so yes it looks like companies are inclined

to get something done in 2009.


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Were observing signicant changes to buyers outsourcing plans and

strategies. Clients focus on liquidity and survival for now, with a view to

helping them return to growth later, is translating into: increased demandto learn more about outsourcing but extended drag in making nal

decisions; customer requirements are less focused on very specic process

needs and aimed more at share the art of the possible with me;; clients

say they need to act fast but are driving RFPs through lengthy procurement

processes before down-selecting to one or making the decision to cross the

nish line.

Service Provider Responsiveness to Changing Buyer Needs

EquaTerra polled its advisors as to how well overall third-party business and IT

service providers are responding to the changing needs of buyers under current

stressed market conditions, involving pricing levels and models, the mix of onshore

and offshore work, exibility and creativity in the sourcing process and in deal

structuring, etc. Advisors ranked service providers on a one-to-ve scale with one

being providers are doing a poor job/are not at all responding to changing buyer

needsand ve being providers are doing a good job/very responsively reacting

to changing buyer needs. Overall, service providers scored at the mid-point, 2.99

on the one-to-ve scale. There were no major variations by advisor geography or

functional coverage area.


Economic conditions clearly are impacting the volume of demand for third-party

business and IT services and the time it takes demand to get to market. Conditions

also are inuencing the deal structure buyers are pursuing. EquaTerra queried both

advisors and service providers in the 1Q09 Pulse on how market conditions are

impacting new and existing outsourcing deals in the market. Respondents were

asked to rank on a one-to-ve scale how different buyer responses are to market

conditions relative to their outsourcing efforts (see Figure 8).


1.00 2.00 3.00 4.00 5.00

Deemphasizing use of Indian SP's

Consolidating business w' large,tier one SP's

Focusing more ononshore/nearshore

Adding new business w' existing SP's

Pursuing deals smaller in scope

Pushing SP's to finance/defer/absorbupfront costs

Pursuing deals that have short ROItimeframes

Pursuing deals focused oncost savings

V

Service Providers

Advisors

Figure 8


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The most commonly cited response identied by both buyers and service providers

was that buyers are pursuing deals primarily focused on cost savings (vs. process

improvement, access to external talent). This response was ranked at 4.3 on theone-to-ve scale.

Advisors and service providers also agreed that buyers are more commonly pursuing

deals that have short (


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FAO remained the area of top demand cited by service providers in 1Q09 (see Figure

10) and was followed by ITO. It is important to note that demand levels registered in

the Pulse surveys are impacted by the particular outsourcing service providers polledin any one quarter.

Service Providers: Demand by Functional Area

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Procurement

Other

CC/CRM

HRO

ITO

FAO

1Q09

1Q08

1Q07

Figure 10

EquaTerra has seen both demand and supply grow for outsourcing services beyond

general and administrative back-ofce functions over the past two to three years.

These new areas include knowledge process outsourcing (KPO) for functions like

engineering, research and development (R&D), analytics and legal process work,

and nancial analysis, modeling and analytics. Some of these functions are specic

to certain industries, such as drug development and clinical trial services in thepharmaceutical market. There is also outsourcing supply and demand growth in

areas such as document services, facilities and real estate management, and logistics

services. Please refer to prior quarterly Pulse survey reports for more details on

demand trends in these outsourcing areas.

Growth in these emerging areas is getting stronger in the current market

environment. EquaTerra expects to see outsourcing demand growth in areas like

R&D and nancial analytics. Banking and nancial services rms, for example, along

with western pharmaceutical rms, face signicant cost and competitive pressures.

In response, they are fundamentally overhauling how they deliver core services.

Recent economic events will only further hasten this trend.

Suppliers targeting these areas in 2009 must balance the desire to build capabilities

and clients in the newer market segments with their ability to continue funding

investments during more challenging economic times. Reduced funding to support

market penetration efforts will slow growth in these areas.

The charts on the following two pages illustrate outsourcing demand by process

area for the four major functional areas IT, HR, F&A and procurement covered in

the Pulse surveys.


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Advisors:Functional and Process Area Demand

Advisors: HRO Demand

0% 20% 40% 60% 80% 100%

Expatriate & Relocation

Other

Learning/Training

Workforce Effectiveness

Compensation

Recruiting/Talent Mgmnt

Benefits

HR IT

Payroll

1Q09

1Q08

1Q07

Advisors: FAO Demand

0% 20% 40% 60% 80% 100%

Finance, Control, Risk Mgmnt

Travel & Entertainment

General Accounting

AR/C&C

Accounts Payable

1Q09

1Q08

1Q07

Advisors: ITO Demand

0% 20% 40% 60% 80% 100%

Networks/Telco

Packaged Apps Svcs

Desktop Services

Infrastructure/Ops

ADM

1Q09

1Q08

1Q07

Advisors: Procurement Outsourcing Demand

0% 20% 40% 60% 80% 100%

Receiving/Inventory

Other

Fin. Rep./Analysis

Mgmnt/Admin.

Fixed Assets

Req. & Approval

Category Mgmnt

Order Mgmnt

Strategic Sourcing

AP

1Q09

1Q08

1Q07

Service Providers:Functional and Process Area Demand

Service Providers: HRO Demand

0% 20% 40% 60% 80% 100%

Exp & Relo

Workforce Eff.

Recruit/Tal. Mgmnt

Compensation

Learning/Training

HR IT

Benefits

Payroll

1Q09

1Q08

1Q07

Service Providers: FAO Demand

0% 20% 40% 60% 80% 100%

Other

Decision Support

Travel & Entertainment

Fin, Control, Risk Mgmnt

General Accounting

AR/C&C

Accounts Payable

1Q09

1Q08

1Q07

Service Providers: ITO Demand

0% 20% 40% 60% 80% 100%

Networks/Telco

Other

Desktop Services

Packaged Apps Svcs

Infrastructure/Ops

ADM

1Q09

1Q08

1Q07

Service Providers: Procurement Outsourcing Demand

0% 20% 40% 60% 80% 100%

Other

Req.Approval

Receiving/Inventory

Fin. Rep./Analysis

Fixed Assets

Category Mgmnt

Mgmnt/Admin.

Strategic Sourcing

Order Mgmnt/Trans Processing

AP

1Q09

1Q08

1Q07


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Demand Trends by Industry

The two charts below illustrate industry demand as cited by EquaTerra advisors and

service providers. Industry rankings generally have been consistent between the two

groups over the past few quarters.

Advisors: Demand by Industry

0% 20% 40% 60%

CPG, Food/Bev, Retail, Wholesale

Pharma/Biotech

Govt (Fed, State, Local), Edu

Banking, Fin Svcs, Insurance

Energy/Utilities, Oil & Gas

1Q09

1Q08

1Q07

Figure 11

Service Providers: Demand by Industry

0% 20% 40% 60% 80%

Govt (Fed, State, Local), Edu

Energy/Utilities, Oil & Gas

CPG, Food/Bev, Retail, Wholesale

Manufacturing

Banking, Fin Svcs, Insurance

1Q09

1Q08

1Q07

Figure 12

There are several key points to highlight relative to demand by industry. One is

increased strength in demand in the banking and nancial services industries. Thisis not surprising given the challenges buyers in these sectors are facing and the

need they have to reduce costs. It shows that buyers are still striving to execute

sourcing efforts despite the operational challenges they face. Public sector demand

also remains strong, though it is comprised of a proportionally higher percentage

of non-outsourcing third-party services. Ironically, there are also emerging signs

that newly infused stimulus money is being spent on third-party services. Public

sector organizations are showing increased interest in moving from legacy customer

software application environments to commercial ERP (enterprise resource planning)


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systems as a means to reduce operating costs, and improve and standardize service

delivery models. Finally, energy and utility buyers are very focused on reducing

operational costs through the use of internal shared service operations andoutsourcing.

Sales Cycle

For the purposes of the Pulse surveys, the sales cycle is dened as the time period

from RFP release to contract signing. Many factors contribute to the length of the

sales cycle, including:

What is being outsourced

Level of buyer sophistication and experience

Complexity, size and regional/global reach of the potential outsourcing deal

Degree of multi-sourcing present in the deal port folioPreferred service provider sales pursuit capacity and selectivity

Whether a sourcing advisor is being used

Disruption to the sourcing process by turmoil in the buyer organization,

economic uncertainty, or changing macro-business all heightened issues in

the current market

The Pulse surveys do not measure the absolute length of sales cycles. EquaTerra

estimates, however, the sales cycle for larger deals (those with more than $50 million

in total contract value, or TCV) that are competitively bid is typically six to 12 months

barring deal ow disruption -- from the time the buyer goes to the market until the

deal is closed.

Current market trends are contributing to both shortening and lengthening sales

cycles. Smaller deals pursued by more experienced buyers can lead to shorter sales

cycles, as can the use of speed sourcing techniques addressed in last quarters

Pulse survey. On the other hand, the complexities associated with multi-sourcing

can complicate the sourcing process and extend the sales cycle, as can considering

more intricate pricing arrangements. EquaTerra sees most buyers today more

intensely scrutinizing pricing models and levels. Global deals also are more complex

to source. The major factor affecting sales cycles over the past year, however, has

been sourcing cycle disruption caused by economic events. EquaTerra expects to see

market conditions complicate the sourcing process, especially in industries currently

in ux (such as nancial services), for the balance of 2009.Figure 13 illustrates sales cycle trends according to service providers polled in this

quarters study.

Thirty-three percent of service providers indicated sales cycles were

lengthening, up from last quarter, for the fth straight quarterly increase.

Just 10 percent of service providers indicated sales cycles were shortening.


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Service Providers: Sales Cycle

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Lengthening Same Shortening

Figure 13

Pricing Competitiveness

Increased pricing competitiveness implies the buyer has the upper hand and is

getting a better priced outsourcing deal. As pricing is one element of determining

protability, the alternative of less competitive pricing is generally favorable to the

service provider. The consensus among service providers polled, especially Indian

providers, is that buyers are getting more aggressive with their pricing demands.

Figure 14 illustrates pricing trends according to service providers in this quarters

study.

Seventy-six percent of service providers polled indicated that pricing pressureincreased in the quarter. This represents a jump of over 30 percent from last

quarter and last year, nearly double the survey average. Indian service providers

were nearly unanimous on increased pricing aggressiveness.

Just 24 percent of service providers indicated pricing pressure remained

unchanged, and no providers indicated pricing pressure was becoming less

aggressive.


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Service Providers: Pricing

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


More Aggressive Same Less Aggressive

Figure 14

While there is a stronger desire among buyers today to get more aggressive

with pricing, a number of factors can ultimately temper nal pricing levels. More

experienced buyers generally are aware that the lowest price may not lead to the

best deal. There is concern now in the market among buyers about entering into

deals today that will fail because of bad pricing. Buyers also can reduce overall spend

the ultimate goal by lowering consumption levels, but still pay an equitable unit

price for services that help ensure they get the providers top resources.

Service providers inuence pricing competitiveness by the extent of their own

aggressiveness in pursuing deals. More service providers in the market today are

increasingly selective about the clients and deals they pursue. Service providers aremore closely assessing the risk proles of clients they are pursuing and adjusting their

pricing accordingly. Buyers in nancially difcult situations or industries are treated

with higher risk premiums and contract terms that can increase deal pricing. Buyers

in good standing will receive attractive pricing even with similar risk proles to those

from the past. Buyers viewed by providers as platinum accounts also will get more

favorable pricing. Similarly, highly strategic clients that can propel a provider into

a desirable industry segment, for example, will get better pricing even though the

provider is not offering blanket market reductions.

Providers must still cover their operating costs, overhead, margin and risk. They

continue to look for ways to reduce operating costs and overhead to meet their

current contract commitments and continue to push price competitive policies

regardless of the economic downturn. The net result is more aggressive pricing in

the market, but not routinely egregious pricing terms, at least for top tier service

providers or less desirable buyers.


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Deal Scope

Deal scope is dened as the number of processes, users, geographies, etc., included

in an outsourcing arrangement. Contract value usually is directly correlated to scope,

though the mix of remote/low-cost delivery resources involved also affects contract

value. From the outsourcing buyers perspective, understanding trends in scope and

contract value helps not only to determine how aggressively other organizations are

pursuing outsourcing, but also how to dene and construct a viable and potentially

optimal-sized deal. The growth of the multi-sourcing/multi-provider outsourcer has

both driven and resulted from smaller deal scope. On average, scope levels have

been at to declining for the past two years.

Figure 15 illustrates deal scope trends according to service providers polled in this

quarters study.

Scope change levels largely were unchanged in the quarter. Twenty-nine

percent of service providers polled indicated that scope was increasing, down

four percent from last quarter but up 10 percent year over year.

The majority of providers indicated scope levels were unchanged while 19

percent indicated they decreased in the quarter.

Service Providers: Scope

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Decreased Same Increased

Figure 15

Service Providers: Contract Proftability and Ability to

Increase Scope

A variety of factors impact service provider protability, including deal scope,

transition costs and time frames, and buyer pricing sophistication. Exchange rates

and wage ination also affect service provider protability, particularly rms with

extensive global operations. Service providers with a higher mix of remote/low-cost

resources have been putting pressure on the protability of competitive peers with

fewer lower-cost resources for the past several years. This pressure has eased over

recent quarters as more providers globalize, exchange rate trends shift and market

growth slows.


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Over the past year all providers have faced pressure on existing contract protability.

This has resulted from buyer pricing pressure, more competition for business, buyer

pull-back on more protable discretionary services, and an increased focus on costcutting over process improvement work.

Figure 16 illustrates contract protability trends according to service providers polled

in this quarters study. The Pulse survey addresses protability on existing contracts,

not new deals in the pipeline.

Just 20 percent of service providers polled indicated contract protability was

improving. This level is up three percent for the quarter, but down 10 percent

for the year and below the survey average of 38 percent.

Seventy percent cited no change in protability levels. There was no trending

on scope based on type of service provider polled.

Service Providers: Contract Proftability

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Declining Profitability Same Amount Improving Profitability

Figure 16

Figure 17 illustrates service provider expectations about their ability to increase

scope in current accounts. All providers today are very focused on growing business

in existing accounts, with some exceptions (e.g., problem buyers in turmoil). This is

because pursuit costs are lower than competing for new business, but it also helps to

protect their base as buyers rationalize suppliers and cut back on spend levels.

Eight-ve percent of service providers expected to increase scope in current

accounts, up 24 percent from 4Q08, the second highest level recorded in thelife of the survey. This bodes well for future deal bookings, as well as improved,

or at least defended, protability levels.

No service providers indicated scope would decline in existing accounts.


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Service Providers: Ability on Increase Scope

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Decline Remain Constant Increase

Figure 17

Service Provider Capacity

Service provider capacity is an important factor that inuences other trends, such

as pricing competitiveness, sales cycles and protability. EquaTerra denes service

provider capacity as the availability of adequate and skilled resources for sales

pursuit, engagement and transition/delivery. Capacity constraints often are more

prevalent in BPO than the more mature ITO market. The challenge service providers

face is the scarce supply of quality experience, which takes time and multiple

outsourcing deals to develop.

Capacity also is tightly linked to service provider aggressiveness in deal pursuit. When

service providers are being more selective and entering into fewer deals, as is often

the case in todays BPO market, they need less capacity for pursuit and delivery. Thus,

capacity is intentionally constrained to keep costs down and to match capacity to

demand goals. As both BPO buyers and service providers focus more on smaller deals

with fewer processes in-scope, capacity pressure also is lessened.

Figures 18 through 20 illustrate combined capacity levels for pursuit and delivery,

and then separately break out the two.


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Advisors: Service Provider Capacity Overall

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

4 Q0 5 1 Q0 6 2 Q0 6 3 Q0 6 4Q 06 1 Q0 7 2 Q0 7 3 Q0 7 4 Q0 7 1 Q0 8 2 Q0 8 3 Q0 8 4 Q0 8 1 Q0 9

Constrained/Tightening Unchanged Adequate/Increasing

Figure 18

Advisors: Service Provider Capacity, Pursuit

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09


Figure 19

Advisors: Service Provider Capacity, Delivery

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09


Figure 20


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Overall capacity levels remained largely unchanged in the quarter after seeing

gradual improvements over the past year. Twenty-four percent of advisors

overall cited improved capacity, up slightly for the quarter and up nine percentfrom 1Q08 (see Figure 18). Twenty-nine percent of advisors cited constrained

or tightening service provider capacity, down one percent year over year.

Capacity for sales pursuit and deal structuring (see Figure 19) constricted

slightly. Twenty-nine percent of advisors cited constrained levels, up for the

fourth straight quarter and the h ighest level since 4Q07. Sales pursuit capacity

is dually impacted by more supplier selectivity (improves capacity) and more

market demand (strains capacity, especially as service providers manage down

pursuit costs).

Capacity levels for deal transition and delivery continued to improve (see

Figure 20). Constrained or tightening citation levels came in at 29 percent,

down quarter over quarter and year over year. Twenty-two percent of advisors

indicated transition capacity was adequate, up from 11 percent last quarter.

Delivery capacity improvement is largely a function of service provider

selectivity in deal pursuit.

Both sales and delivery capacity vary across functional areas of outsourcing and

across different supplier classes. Sales capacity is less constrained for larger global

deals (cited by just 13 percent of advisors) and more constrained in the Americas (37

percent of advisors) than in Europe (28 percent of advisors). Transition and delivery

capacity also was more constrained in the Americas than Europe (41 percent and

23 percent respectively) and in BPO compared to ITO (39 percent compared to 17percent respectively).

Digging into the reasons for positive and negative changes in service provider

capacity, EquaTerra advisors offered the following comments.

Pursuit capacity

Bid dollars being focused on must win opportunities, speculative punts a

thing of the past.

Increasing competition is creating a greater focus on sales pursuits. At this

stage all vendors are trying to win more business. In the past vendors have

cut their sales capability and focused on making money from the deals they

have.

Tendency for constraint in suppliers internal costs of sale is balanced by

increased market activity and potential for business.

Delivery capacity

There is a push to improve the quality of transition teams; more pressure

on transition cost, no mistakes are allowed!


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Service provider capacity is already insufcient in a normal market so will

be even more problematic in a market where demand for outsourcing is up

and where contracts are closely aimed at cost reductions for the customer,which is additionally demanding for the providers to manage.

Delivery capability seems to be improving. Believe that transactions now

have less aggressive scope and objectives resulting in projects more easily

delivered by the providers.

Several providers have used this time to enable delivery to catch up with

sales. Delivery adequacy is improving, and service level compliance will

follow.

Not surprisingly, outsourcing service providers typically have been more optimistic

about their own capacity. Figure 21 illustrates contract pursuit and delivery capacity

trends according to service providers polled in this quarters study.

Forty-three percent of service providers indicated capacity was adequate or

increasing, up 10 percent from 4Q08 but down from 64 percent in 1Q08.

India-based service providers were somewhat more likely to indicate capacity

was improving.

Just 14 percent of providers indicated that capacity was constrained or

tightening, down for the fourth quarter in a row.

Providers concurred that more client and deal selectivity is helping to improve sales

pursuit capacity levels. The ongoing expansion of global delivery footprints similarly is

helping improve transition and delivery capacity. On the issue of the quality of salesor pursuit capacity, advisors and services providers continue to have differences of

opinion.

Service Provider Capacity

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

4 Q0 5 1 Q0 6 2 Q0 6 3 Q0 6 4Q 06 1 Q0 7 2 Q0 7 3 Q0 7 4 Q0 7 1 Q0 8 2 Q0 8 3 Q0 8 4 Q0 8 1 Q0 9


Figure 21


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Update on Existing Deal Structures and OutsourcingGovernance


This section of the Pulse will review the impact current negative market conditions

are having on outsourcing deals that are in ight (see Figure 22). There has been

much debate in the market about whether buyers will continue forward with existing

deals, push to open up deals to negotiate more favorable pricing and other terms

and conditions, or bring some or all business back in-house as existing deals come

to term. EquaTerra nds, for the most part, these predicted trends are more the

exception than the norm and that most deals continue to move forward under

previously dened terms and conditions.

EquaTerra queried both advisors and service providers as to how market conditions

are impacting existing outsourcing deals in the market. Respondents were asked to

rank on a one-to-ve scale how different buyer responses were to market conditions

relative to their outsourcing efforts.

The most common response cited by advisors was that buyers are opening

deals up to get better pricing (3.74 on the one-to-ve scale). This was the

second most common response cited by service providers (3.20), who ranked

as most common the buyers efforts to meaningfully scrutinize existing deals

from a governance and supplier nancial risk perspective. Advisors gave

high scores to this response.

Opening up deals to change other deal terms/conditions (e.g., volumes,

performance levels) and overhauling outsourcing governance operating

models (consolidating efforts, for example) also were commonly identied

buyer responses to market conditions.

Buyers were less commonly identied as shifting more work onshore/

nearshore from current offshore locations or pulling work back altogether

from offshore service providers, though this is occurring selectively in the

market. Logically, buyers involved in larger global deals are less likely to pull

from offshore, which is counter intuitive to the concept of global sourcing.


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1.00 2.00 3.00 4.00

Pulling work backoffshore altogether

Shifting more workonshore/nearshore

Investing more in governance

Overhauling governanceoperating models

Opening up deals up to changeother deal terms/conditions

Scrutinizing existing dealsrelative to risk

Opening up deals up

to get better pricing

V

Service Providers

Advisors

Figure 22

Market Conditions: Impact on Outsourcing Governance

EquaTerra also examined the degree to which and in what ways market conditions

are impacting buyer organizations ability to successfully conduct outsourcing

governance efforts. There is a concern that outsourcing governance, a collective

set of activities often under-funded and under-appreciated even in good economic

times, could bear an undue and ill-advised brunt of cut-backs as organizations pare

back expenses. Pulse ndings tend to support this concern.

EquaTerra views quality outsourcing governance processes and models, resources

and supporting software tools as critical enablers to outsourcing success. Our market

research consistently has found a direct correlation between buyers governance

capabilities and investments and outsourcing success and satisfaction.

Overall, both buyers and service providers indicated that market conditions were

having at least somewhat of a negative impact on buyer outsourcing governance

operations (see Figure 23). Sixty-ve percent of advisors indicated conditions were

having a minor negative impactand 20 percent cited a major negative impact.

Advisors in Europe were more likely than those in the Americas (26 percent and 10

percent respectively) to indicate conditions were having a major negative impact.

Service providers were more sanguine, with 44 percent indicating market conditions

having no material impacton buyer outsourcing governance efforts and just six

percent citing a major negativeimpact.


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EquaTerra urges buyers to use caution in cutting back outsourcing governance

investments as part of general cost cutting efforts. The correlation between

outsourcing governance capabilities and outsourcing satisfaction and successhighlights the importance of a strong outsourcing governance program. Recent new

results from the EquaTerra European ITO service provider performance satisfaction

market studies (see Figure 25) further reinforces this point. Seventy percent of buyers

that rated their outsourcing governance capabilities as excellent were satised with

the performance of their outsourcing service providers. Just 53 percent of buyers

that assessed their outsourcing governance capabilities as weak were satised with

their service providers performance.

Sample #1 from EquaTerra European ITO Service Provider Performance and

Satisfaction Study

53%

57%

64%

70%

Weak

Average

Good

Excellent

e t c on t t r c pr de ( )

u

t

e

e

s/c

ete

c

esto

t

t

e

p

d

Figure 25

Recent market events have made many buyers more nervous about global sourcing

efforts. Terrorist attacks in India, the nancial problems experienced by Satyam,

and the global economic turmoil in general have made business-as-usual difcult,

if not impossible, to maintain. Buyers can account for and defend against risk when

entering into new global sourcing efforts in many ways. The bigger issue for many

buyers, however, is addressing risk in already established global sourcing efforts that

were deployed when market conditions were better and attention to risk often not

great enough. Please refer to last quarters Pulse whitepaper, as well this webcast, for

EquaTerras advice on how to address and manage risk in global sourcing efforts.

Service Provider Market Update

On an ongoing basis EquaTerra conducts a comprehensive market study of ITO

service provider (expanding to BPO providers 2H09) performance and satisfaction

across several European markets. This market study program surveys and interviews

buyers actively engaged in outsourcing efforts with a named set of leading market-

specic providers.


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The research unveils direct insights into buyer opinions on service provider

performance levels, also assessing and interpreting general outsourcing demand and

activity trends in the markets covered. Market coverage and due dates for the nexteditions of these studies are as follows:

U.K. (released 4Q08)

Netherlands (released 4Q08)

BeLux (2Q09)

Nordics (2Q09)

Germany (2H09)

Pan-European ITO (2Q09)

Pan-European FAO (2H09)

North American FAO (4Q09)

Pan-European HRO (2010)

Figure 26 provides another snapshot of the results from the Pan-European ITO

performance and satisfaction study. It illustrates general satisfaction levels for buyers

in application management (AM), infrastructure management (IM) and end-user

management (EUM) outsourcing efforts. In all cases, over 65 percent of respondents

were somewhat satised, satised, or very satised with their outsourcing efforts and

service providers performance levels. This is a positive endorsement of the success

that European buyers are having with their ITO efforts.

Sample #2 from EquaTerra European ITO Service Provider Performance and

Satisfaction Study

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%100%


More Recompetes Same Amount Less Recompetes

Figure 26

EquaTerra also conducted a service provider Pulse survey in the Netherlands this

quarter in parallel with the global advisor and service provider Pulse surveys. We will

release the results from the Dutch study in May 2009. For additional details on this

research offering and copies of executive summary reports for all of these research

efforts, please contact: [email protected].


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Deal Snapshot

EquaTerra estimates approximately 100 outsourcing deals (in ITO and the functional

BPO areas covered in the Pulse surveys) with greater than $50 million in TCV were

announced in 1Q09. Average TCV for these deals was approximately $260 million.

This compares to approximately 120 deals with an average TCV of $225 million in

4Q08. Two very large U.S. defense industry deals -- Verizon and the Department of

Defense for $2.5B, Lockheed Martin and U.S. Special Operations Command for $5B

-- skewed up the average deal size in the quarter.

Less than 20 of these 1Q09 deals were purely BPO, with an average deal size of

approximately $150 million TCV. When estimating the number of new deals and

average TCV, it is important to recognize that some deals are not publicly announced

or the deal details are not provided. The ultimate TCV of a deal also is likely to change

over the life of the contract. There were approximately 180 total BPO and ITO dealswith TCV levels greater than $25 million in the quarter, down from 225 in 4Q08.

Following is a select list of some of the top deals announced in 1Q09. The greatest

level of market activity during this quarter occurred in the military/aerospace

segments.

Select Top Deals

Capita win estimated at 500M over 15 years with AXA Sun L ife. Capita will take

over customer service and other administrative duties relating to 3.2 million life

and pension policies written by AXA Sun L ife.

IBM win estimated at approximately 360M over seven years with ENDESA(Spanish/Latin American utility). IBM will provide various IT infrastructure

services to ENDESA and its clients in Spain and Latin America.

Telefonica win estimated at approximately 350M over ve years with

Deutsche Post World Net. Telefnica will offer mobile, xed voice, and data

services in 28 European countries

IBM win estimated at approximately $500M over seven years with Kaiser

Permanente. IBM will provide data center operations and application

management services.

EDS/HP win estimated at approximately 700M over 10 years with Aviva (UKinsurance). EDS/HP will provide a full range of data center services.

Verizon win estimated at approximately $2.5B over 10 years with the U.S.

Department of Defense (Defense Information System Network Transmission

Services). Verizon will provide a broad range of telecommunications and

network services to military installations globally.

Lockheed Martin win estimated at $5B over 10 years with the U.S. Special

Operations Command. Lockheed Martin will provide logistics services, including

IT network and infrastructure management.


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HCL Technologies win estimated at $350M over seven years with Readers

Digest. HCL Technologies will provide IT infrastructure and network ser vices

globally.

Service Providers: Current Deal Portfolio Status

In the nal section of the Pulse survey, EquaTerra asked service providers to prole

the state of their current deal portfolio from several dimensions:

Recompetes/Renegotiations

Cancellations/Non-renewals

Problem Contracts

These results are provided for informational purposes only and to highlight ongoing

market directional trending. They do not represent actual deal total in any of the

categories proled. The number of service providers citing increased levels of

recompetes and renegotiations rose to 45 percent, the highest level ever recorded

in the Pulse survey. Cancellation and problem account levels remained largely

unchanged.

Service Provider Re-competes and Renegotiations

3%

3%

2%

10%

9%

9%

19%

18%

15%

31%

30%

37%

32%

34%

34%

5%

6%

3%

EUM

IM

AM

Very unsatisfied Unsatisfied Somewhat unsatisfied

Somewhat satisfied Satisfied Ver y satisfied

Figure 27


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Service Provider cancellations and now-renewals

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


More Sa me Less

Figure 28

Service Provider problem contracts

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Up Same Down

Figure 29

Conclusion

EquaTerra offers the following conclusions from the 1Q09 Pulse survey:

BPO and ITO market demand growth improved in 1Q09 according to EquaTerra

advisors and third-party business and IT service providers polled. Signs indicate

this trend will continue during the rest of 2009. Pent-up buyer demand created

but not consummated in the second half of 2008 is now making it to market.Uncertain market conditions and turmoil within individual buyer accounts will

continue to slow or stop some sourcing efforts, albeit less frequently.

The market for more discretionary third-party services, such as consulting,

systems integration and some application development work , is weaker than

for outsourcing. The exception is in the public sector and military/aerospace

markets where demand for all types of third-party business, mission support

and IT services remains strong. U.S. public sector demand for third-party

services continues to grow, driven in part by stimulus fund inows.


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Market conditions overall are driving more demand for outsourcing, but the

nature of the demand continues to change. Buyers are increasing pricing

pressure on service providers and are demanding more upfront and clearlydened costs savings. The deal sizes are smaller and there is a strong focus on

cost savings and cost avoidance. Pricing pressure varies based on the quality

and desirability of both the buyer and the service provider.

Market conditions are causing some buyers to push to open up existing deals

for better pricing and other terms and conditions. Buyers for the most part are

not pulling back from existing outsourcing efforts, global sourcing or the use of

offshore-based service providers.

Global sourcing efforts will face more scrutiny in 2009 given market events

(e.g., terrorist attacks in India, Satyam implosion and local unemployment

trends), but will continue to grow. Buyers will increase focus and improve

abilities to address and account for risk in global sourcing efforts.

Buyers in 2009 will migrate and consolidate third-party service work to larger

and more established providers in a ight to quality, but also to gain economies

of scale and preferred pricing, terms and conditions. Leading service providers

will remain selective in the clients and the business they pursue while tier two

and below providers will scramble for whatever business they can get.

Market conditions are negatively impacting buyer abilities to perform

outsourcing governance tasks as resources are cut and attention is focused

elsewhere in the organization. This is dangerous given the key role outsourcing

governance efforts play in enabling outsourcing success and satisfaction.

Service provider capacity for deal pursuit is improving, though this is largely a

function of more service provider selectivity and discretion around the deals

and clients they choose to pursue. Service provider capacity for deal transition

and delivery also is improving.


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Appendix - Key Questions by Advisors Primary Geography and Outsourcing Focus Area

Question Response Total Global Americas EMEA ITO BPO BPO & ITO

Demand -

Overall

Up 49% 58% 47% 42% 47% 43% 52%

Flat 41% 42% 44% 41% 39% 44% 43%

Down 10% 0% 9% 17% 14% 12% 5%

Demand - By

Service Model

BPO 22% 27% 28% 12% 6% 52% 17%

ITO 59% 40% 52% 71% 75% 24% 75%

Other IT services 7% 20% 3% 5% 6% 5% 4%

Internal improvement 15% 13% 17% 12% 14% 19% 4%

Other IT services 5% 7% 6% 10% 10% 15% 9%

Demand - By Service Model - Change

BPO

Up 49% 53% 50% 46% 54% 37% 58%

Flat 39% 47% 46% 29% 31% 41% 42%Down 12% 0% 4% 25% 15% 22%

ITO

Up 56% 69% 59% 50% 51% 33% 76%

Flat 35% 31% 30% 40% 38% 53% 24%

Down 9% 0% 11% 10% 11% 13%

Other IT

services

Up 21% 38% 29% 9% 20% 36% 13%

Flat 62% 63% 59% 64% 60% 55% 69%

Down 17% 0% 12% 27% 20% 9% 19%

Internal imp.

Up 60% 73% 50% 62% 63% 67% 61%

Flat 34% 27% 41% 31% 26% 29% 39%

Down 6% 0% 9% 7% 11% 5%

ServiceProvider

Capacity -

Pursuit

SP capacity is constrained/tightening 29% 13% 37% 28% 32% 33% 18%

SP capacity is unchanged 45% 67% 40% 41% 44% 42% 50%

SP capacity is adequate/increasing 26% 20% 23% 31% 24% 25% 32%

Service

Provider

Capacity -

Delivery

SP capacity is constrained/tightening 29% 25% 41% 23% 17% 39% 38%

SP capacity is unchanged 49% 63% 37% 51% 63% 35% 43%

SP capacity is adequate/increasing 22% 13% 22% 26% 20% 26% 19%

Economy

Driving more outsourcing 51% 63% 65% 37% 42% 48% 60%

Slowing/rethinking outsourcing plans 44% 31% 32% 58% 56% 52% 28%

Little/no impact 4% 6% 3% 5% 3% 0% 12%

Market

Conditions:

Impact on

New Deals

Adding new business w existing SPs 3.47 3.75 3.50 3.36 3.42 3.55 3.48Consolidating business w large, tier one SPs 2.91 3.08 2.91 2.85 2.90 2.90 3.15

De-emphasizing use of Indian SPs 2.78 2.73 3.14 2.57 2.75 2.84 2.70

Focusing more on onshore/nearshore 3.01 2.75 3.16 3.00 3.07 3.18 2.75

Pursuing deals smaller in scope 3.72 3.92 3.69 3.68 3.55 3.96 3.81

Pursuing deals focused on cost savings 4.30 3.93 4.37 4.38 4.27 4.42 4.30

Pursuing deals that have short ROI timeframes 3.84 3.36 4.07 3.84 3.78 3.96 3.86

Pushing SPs to nance/defer/absorb upfront costs 3.82 3.77 3.75 3.89 3.84 3.83 3.81


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Market

Conditions:

Impact on

Existing Deals

Scrutinizing existing deals relative to risk 3.66 3.50 3.48 3.83 3.64 3.52 4.00

Opening up deals up to get better pricing 3.74 3.29 3.74 3.90 3.72 3.57 4.11

Opening up deals up to change other deal terms/

conditions3.59 3.64 3.42 3.68 3.49 3.52 3.90

Shifting more work onshore/nearshore 2.54 2.07 2.81 2.56 2.45 2.35 2.74

Pulling work back offshore altogether 2.06 2.00 1.90 2.17 2.10 2.17 1.95

Investing more in governance 3.01 2.93 3.05 3.03 3.15 3.05 2.75

Overhauling governance operating models 3.42 3.38 3.36 3.47 3.47 3.50 3.25

Market

Conditions:

Impact on

Outsourcing

Governance

Major Negative 20% 20% 10% 26% 22% 25% 14%

Minor Negative 65% 73% 72% 57% 58% 54% 82%

No Material 15% 7% 17% 17% 19% 21% 5%

Market

Conditions:

Impact on

Outsourcing

Governance

OG team budget/staff cuts 3.27 3.14 3.38 3.24 3.22 3.44 3.36

Retained organization, budget staff/cuts 3.29 3.14 3.32 3.33 3.17 3.42 3.38

Inadequate support from execs/mgmnt 3.29 3.57 3.31 3.18 3.14 3.16 3.71

Outsourcing deal out of sync with current ops 3.19 2.86 3.16 3.34 2.97 3.32 3.65

Uncertain organization future complicating

renewal/renegotiation3.34 3.07 3.28 3.49 3.26 3.68 3.17

Decline in the quality of SP services 2.74 2.36 2.96 2.74 2.67 2.74 2.79

Declines in the levels of SP support 2.71 2.43 2.96 2.67 2.73 2.47 2.68

Uncertainty over future SP stability/viability 3.01 2.57 3.12 3.12 3.06 2.90 3.00

Service Provider Responsiveness to Changing Buyer Needs 2.99 3.36 2.93 2.91 2.87 3.00 3.17


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About EquaTerra

EquaTerra sourcing adv isors help clients achieve

sustainable value in their IT and business processes .

Our advisors average more than 20 years of

industry experience and have supported over 2000

transformation and outsourcing projects across more

than 60 countries. Supporting clients throughout

the Americas, Europe, and Asia Pacifc, we have deep

functional knowledge in Finance and Accounting,

HR, IT, Procurement and other critical business

processes. EquaTerra helps clients achieve signifcant

cost savings and process improvement with internal

transformation, shared services and outsourcing

solutions.

www equaterra com

Contact Us

If you would like to know more about EquaTerra, please contact us.

For details of all our locations visit ww w.equaterra.com/locations

For more information on EquaTerras research effort s,

please contact Stan Lepeak at + 1 203 458 0677;

[email protected]

Europe/Asia Pacic

+44 (0) 845 838 7500

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Americas

+1 713 470 9812

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