Outsourcing hits plateau?

Posted by Mark Brousseau

Given the slow economic recovery, outsourcing hit a plateau for most industries in 2010, though there were a few important bright spots, including financial services, which witnessed a number of large IT deals, and also the travel industry, as more hotel chains sourced their key technology functions, according to research from law firm Morrison & Foerster.

Following are a few highlights from Morrison & Foerster’s research:

... Market uncertainty continues: nagging high unemployment and near-bankruptcies of some European countries have left companies unsure about the value of entering into long-term outsourcing arrangements.

... As Business Process Outsourcing picks up, companies will increasingly demand innovation from providers, hoping to ensure more long-term and embedded value in the sourcing relationship. “Successful innovation can have a multiplier effect which can lead to increased savings going forward,” the report says.

... Cloud computing has become the biggest money-saving sourcing tool – but privacy concerns have generated industry-specific “private clouds.” Morison Foerster expects the development of a new niche market devoted exclusively to cloud computing security.

... Financial services bounced back in 2010 due to large restructurings and the adoption of outsourcing by middle market institutions. Regulators’ close watch on the industry means banks and insurance companies will insist on stable and creditworthy sourcing providers – who might even be called upon to assume responsibility for system failures at banks. Financial services outsourcing should also get a boost from implementation of the Basel II and III and Solvency II international finance accords.

... Heathcare and pharma deals hardly budged in 2010 but the new U.S. healthcare legislation should spur activity in the near future.

... As the recession eases and short-term cost-cutting is replaced by a longer outlook, “green IT” will become more popular, driven by corporate social responsibility agendas, government requirements, and bottom-line savings. More companies are holding sourcing service providers to green standards of energy efficiency and minimizing waste.

... In the U.S., a significant exception to outsourcing’s relatively tepid performance in 2010 was Legal Process Outsourcing, which law firms are adopting at an unprecedented rate. Further, the types of work being outsourced continues to increase in complexity and sophistication, suggesting a rosy future for LPO – something investors and other strategic buyers have noticed.

How do these findings compare to what you are seeing in the market?