The U.S. economy is in the throes of an impending recession. The housing boom has been busted, the sub-prime mortgages have precipitated a credit crisis of the scale and impact that no one has seen before, banks and financial institutions are swimming in a sea of red ink, and basic economic indicators like employment, GDP growth, manufacturing index, retail performance are all headed true south. Thus fares the economy of a country that is the fountainhead of global capitalism and the vanguard of globalization. Is there any scope for good news from the global services industry that derives nearly 40 percent of its revenue from the U.S.?

Yes. Against the gloomy economic backdrop, the global services industry had one of its “finest” quarters in true Churchillian terms. The fourth quarter last year and the first quarter this year taken together were the best two-quarter period in outsourcing in terms of contract award activity measured by Annualized Contract Value (ACV). Consider the following performance indicators by sourcing advisory TPI:

• The 27 mega relationships awarded in the past two quarters represent an all-time high for any previous six-month period
• The Total Contract Value (TCV) awarded over the recent six-month stretch — nearly $50 billion — was among the highest in recent years
• The ACV also saw an unusual level of sequential sixmonth activity — more than $10 billion in ACV, up 25 percent over ACV awarded in the similar six-month period one year ago
• New scope added during the past six months topped all previous six-month levels.

But these numbers don’t tell the whole story; it masks some very important trends in the global services market — the trends that would prevail for the coming periods. Some of these trends present fundamental shifts in the sourcing strategies of companies while others show a shift in the center of gravity for the global outsourcing contracts.

The American market, and particularly the U.S. market, continued to be soft in terms of contract awards. It was the weakest among six previous quarters. Contracts have been shrinking in terms of size and duration. In fact, the average duration of contracts dropped below five years for the first time in Americas, according to a research by TPI. More dramatic is the rise of Europe as the center-stage of outsourcing. More than 65 percent of the global contracts, in terms of TCV and ACV, awarded in the first quarter are from Europe. Eight out of the 11 mega deals in the first quarter came in from Europe. And, amidst the financial turmoil, the financial-services segment in the U.S., which is the highest spender on services, recorded a 70 percent decline in terms of contract volume in the first quarter this year.

While it does not bode the permanent decline of the U.S. market in any manner, it surely tells the story about the rise of Europe in the global services market. The global services industry has remained remarkably resilient to the economic shocks in the U.S., at least till now. Having realized the benefits of outsourcing and offshoring, customers of services would respond to the continuing slowdown in the U.S. in the coming quarters by taking some short-term measures to minimize the financial impact and maximize value. Using the global delivery model to demonstrate business value, service providers would realign their strategy and resources to minimize the risks and protect the bottom-line.

Opportunities Brought in by the Economic Downturn

Data-center optimization/consolidation Business-unit spending increase due to central IT budget controls More likely to use innovative delivery and acquisition models More likely to use IT Infrastructure utility services More likely to use hosting and co-location services Increased use of virtualization Increased demand for offshore delivery of infrastructure and managed services Pipelines will move faster, and will be filled with new prospects Economic downturn may create a critical mass of demand for IT Outsourcing (ITO) services and prompt late outsourcing adopters to explore these services.

Source: Kurt Potter, Research Director, Gartner

Risks & Challenges Brought in by the Economic Downturn

Cuts or freezing of discretionary (project-based) spending Forces some organizations to do drastic cost cutting before a provider is engaged Organizations are more focused on immediate survival than multiyear planning, which includes ITO  Economic downturn may create financially trouble providers, which causes prospective customers to wait longer to outsource Some organizations will cancel ITOcontracts as the reasons for ITO are forgotten; others will renegotiate contracts to take advantage of nervous providers Some organizations will focus on incumbent or current provider partners for speed and agility  Increase in pressure to take customer technical and physical assets Are there any costs left to cut? Years of IT retrenchment may leave few large areas of cost reduction.

Source: Kurt Potter, Research Director, Gartner