Despite the fact that organizations worldwide are deferring capital expenditures, outsourcing continues to be the number one tool chosen to drive organizational change, outpacing business investments in other areas such as hardware, software or other types of more discretionary project-based services, according to EquaTerra’s Advisor and BPO/ITO Service Provider Pulse Survey 3Q08.

Growth in outsourcing was positive but mixed across market sectors, with over 40 percent of those polled citing increased demand levels in the quarter. But the focus is shifting from longer-term initiatives aimed at improving end-to-end business processes toward efforts that deliver quick return on investment (ROI) and/or facilitate short-term business objectives that bring immediate cost savings, help align operating costs to reduced revenue/profits levels and reduce short-term capital outlays.

Key findings from EquaTerra’s 3Q08 Pulse:

Demand for outsourcing – Demand for BPO and ITO rose in 3Q08 according EquaTerra advisors, and was mixed according to service providers. Demand was stronger in Europe than in the North America (64 percent of EU advisors citing increased demand compared to 25 percent in the Americas) and slightly stronger for BPO (58 percent) over ITO (39 percent). Service providers polled were somewhat more pessimistic on demand levels, but, overall, are still seeing market growth.

Forty-one percent of service providers, a drop of 11 percent from last quarter and below the survey average of 55 percent, characterized their 4Q pipelines as up.

Economy both disrupting/driving deal flow – Thirty eight percent overall (service providers 43 percent, advisors 33 percent) cited economic conditions as causing buyers to slow or defer outsourcing efforts, the highest level cited over the past three quarters. However, 42 percent of overall survey respondents indicate economic conditions are driving more outsourcing, despite slowness in certain market sectors.

Increased pricing competitiveness– Half of the service providers polled reported more aggressive pricing, up 15 percent, but contract profitability remains stable – 61 percent of service providers report no change, while 26 percent report a year-over-year improvement. Increased pricing competitiveness is a manifestation of tight market demand, increased competition for deals and more demanding buyers.

Emerging issues/concerns:

Spurred on by globalization, technology and financial forces, outsourcing has gained ground as a strategic change initiative. With greater acceptance and implementation, buyers are beginning to grapple with how to manage and govern multi-provider/multiple outsourcing efforts. While many outsourcing contracts are still initiated at the functional/business unit level, both EquaTerra advisors and global service providers indicate buyers are beginning to establish multi-provider sourcing relationships at the corporate level in an effort to manage business case objectives better and measure ROI.

In recognition of potential overlap/integration issues, more buyers are taking the increased cost and complexity of employing multiple providers in overlapping functional areas into consideration when short-listing potential service providers. Longer term, this trend could lead to more supplier rationalization and consolidation to streamline and simplify sourcing and governance efforts. Bottom line, buyers should account for multi-provider/multiple outsourcing complexities upfront during the sourcing process for new outsourcing efforts.

“Over time, buyers will likely adopt a global, cross-functional or portfolio-based governance approach,” says Stan Lepeak, EquaTerra’s managing director of global research. “Developing and adopting standardized outsourcing governance operational models, investing more in skilled personnel and leveraging software tools to automate and improve governance operations will be central to achieving business case objectives for multi-provider outsourcing efforts.”