Equaterra Whitepaper 1q09 Sp Pulse Survey Results Apr2009 3122

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EquaTerra Advisor and Service Provider Pulse Survey Results – 1Q09

Introduction

Topics explored include:

EquaTerra is pleased to release the findings from its 1Q09 EquaTerra advisor and business and information technology (IT) service provider Pulse surveys. Through these surveys, EquaTerra has developed a highly informative gauge that provides quarterly insights into trends and projections in the outsourcing and third-party business and IT service markets, gleaned from its own field advisors and leading global service providers. EquaTerra’s advisors are the leading experts on business and IT services assisting buying organizations actively exploring or undertaking shared services, outsourcing, offshore and other service delivery alternatives

• Demand and buying patterns, including the impact of market conditions on the demand for outsourcing and related third-party business and IT services

Since their inception in 2004, the EquaTerra advisor and service provider Pulse surveys have yielded insightful analysis of current and ongoing market trends. They capture changes in demand, scope, capacity and related key market indicators. They highlight the changes, and the direction of change, in the business and IT service industry as a whole. The surveys focus on where the market is going and how that direction is changing – or not – compared to prior quarters and years.

The Pulse surveys focus on using outsourcing and other thirdparty services to support the following functional areas:

EquaTerra also incorporates key quantitative market data and leading indicators from sources outside the Pulse surveys. These sources include experiences from direct client advisory engagements and other EquaTerra market research, as well as service provider performance and satisfaction studies. This edition of the advisor and service provider Pulse surveys reflects business and IT service market activity during 1Q09 (January through March 2009) and projections for the balance of 2009.

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• The impact of current market conditions on new and existing deal structures and buyers’ outsourcing governance capabilities and efforts • Outsourcing deal scope, sales cycles, pricing, contract value and profitability • Service provider pursuit and delivery capacity

• • • • • • •

Customer care/call center Finance & accounting Human resources Information technology Knowledge process outsourcing Procurement Vertical industry business services

The following leading global business and IT service providers were polled for this quarter’s sell-side survey: • • • • • • • • •

Accenture ACS ADP Capgemini Ceridian Convergys CSC Hewlett-Packard IBM

• Infosys • Logica • Outsource Partners International • Perot Systems • TCS • Unisys • Wipro • WNS

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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 thirdparty services continues to grow, driven in part by stimulus fund inflows. • 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 clearly defined 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 flight 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.

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. II. III. IV.

V. VI. VII. VIII.

IX. X. XI.

XII. XIII. XIV. XV.

XVI.

XVII.

XVIII.

XIX. XX.

XXI. XXII.

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Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 EquaTerra Advisor Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 BPO/ITO Service Provider Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Market Demand and Market Trends Update. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 1 - Advisors: Market Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 2 - Advisors: Demand by Service Delivery Model . . . . . . . . . . . . . . . . . . . . . . 7 Figure 3 - Advisors: Change in Demand by Service Delivery Model. . . . . . . . . . . . . . 7 Figure 4 - Service Providers: New Deal Pipeline Projections. . . . . . . . . . . . . . . . . . . . 8 Figure 5 - Service Providers: Demand Next Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 6 - Weighted Aggregate Market Demand: Advisors & Service Providers. . . . . 9 Economy’s Impact on Outsourcing Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 7 - Economic Environment’s Impact on Outsourcing. . . . . . . . . . . . . . . . . . 11 Service Provider Responsiveness to Changing Buyer Needs. . . . . . . . . . . . . . . . . . . . . . 12 Market Conditions: Impact on New Deals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Figure 8 - Market Conditions: Impact on New Deals . . . . . . . . . . . . . . . . . . . . . . . . 12 Demand Trends by Functional Area . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 9 - Advisors: Demand by Functional Area. . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 10 - Service Providers: Demand by Functional Area . . . . . . . . . . . . . . . . . . . 14 Advisors:Functional and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Service Providers:Functional and Process Area Demand . . . . . . . . . . . . . . . . . . . . . . . . 15 Demand Trends by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 11 - Advisors: Demand by Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 12 - Service Providers: Demand by Industry . . . . . . . . . . . . . . . . . . . . . . . . . 16 Sales Cycle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 13 - Service Providers: Sales Cycle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Pricing Competitiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 14 - Service Providers: Pricing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Deal Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Figure 15 - Service Providers: Scope. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Service Providers: Contract Profitability and Ability to Increase Scope. . . . . . . . . . . . . . 20 Figure 16 - Service Providers: Contract Profitability. . . . . . . . . . . . . . . . . . . . . . . . . 21 Figure 17 - Service Providers: Ability on Increase Scope. . . . . . . . . . . . . . . . . . . . . . 22 Service Provider Capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 18 - Advisors: Service Provider Capacity Overall. . . . . . . . . . . . . . . . . . . . . . 23 Figure 19 - Advisors: Service Provider Capacity, Pursuit. . . . . . . . . . . . . . . . . . . . . . 23 Figure 20 - Advisors: Service Provider Capacity, Delivery. . . . . . . . . . . . . . . . . . . . . 23 Figure 21 - Service Provider Capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 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 European ITO Service Provider Performance and Satisfaction Study. . . . . . . . . . . 29 Service Provider Market Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Figure 26 - Sample #2 from EquaTerra European ITO Service Provider Performance and Satisfaction Study. . . . . . . . . . . 30 Deal Snapshot. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Service Providers: Current Deal Portfolio Status. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Figure 27 - Service Provider Re-competes and Renegotiations. . . . . . . . . . . . . . . . 32 Figure 28 - Service Provider cancellations and now-renewals. . . . . . . . . . . . . . . . . 33 Figure 29 - Service Provider problem contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Appendix - Key Questions by Advisors’ Primary Geography and Outsourcing Focus Area. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 EquaTerra Advisor and Service Provider Pulse Survey Results - 1Q09 - Page 3

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EquaTerra Advisor Highlights Overall BPO/ITO Market Demand

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

Economy’s Impact on Outsourcing

Fifty-one percent say the economy is driving more outsourcing while 44 percent (down six percent Q/Q) indicate economics are slowing deal flow

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

1. 2. 3.

ITO FAO HRO

Leading HRO Segments

1. 2. 3.

Payroll HRIT Benefits

Leading FAO Segments

1. 2. 3.

AP AR/C&C General Accounting

Leading ITO Segments

1. 2. 3.

ADM Infrastructure/Operations Desktop Services

Leading Procurement Segments

1. 2. 3.

AP Strategic Sourcing Order Management

Leading Industries

1. 2. 3.

Energy/Utilities Banking/Financial Services Public Sector

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 flow.

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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 14 percent Y/Y

Demand Next Quarter

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

Economy’s Impact on Outsourcing

Thirty-eight percent say the economic climate is driving more outsourcing, no change Y/Y; 57 percent indicate buyers are slowing/ rethinking outsourcing

Market Conditions: Impact on New Deals

Driving emphasis on • Cost savings • Adding new business with current service providers • Smaller scope deals

Market Conditions: Impact on Existing Deals

Driving buyers to • Scrutinize deal governance and supplier risk • Open deals to get better pricing • Open 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 Cycle

Thirty-three percent cite lengthening, unchanged Q/Q but up 24 percent Y/Y; 57 percent see no change

Pricing Competitiveness

Much 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 Profitability

Stable; 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 Capacity

Improved; 43 percent cite adequate levels, up 10 percent Q/Q but down 21 percent Y/Y, while just 14 percent cite restrictions

Leading Market Segments

1. 2.

FAO, ITO HRO

Leading ITO Segments

1. 2. 3.

ADM Infrastructure/Operations Desktop, Packaged App Svcs.

Leading HRO Segments

1. 2.

Payroll, Benefits HRIT

Leading Procurement Segments

1. 2.

AP, Order Management Strategic Sourcing

Leading FAO Segments

1. 2.

AP, AR/C&C General Accounting

Leading Industries

1. 2. 3.

Banking/Financial Services Manufacturing CPG, Energy/Utilities

Business and IT service providers polled indicated that demand and pipeline growth improved in the first 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 significantly 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 first 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 overall demand 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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 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 profile the overall market demand for third-party business and IT services. The first (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

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The aggregate market demand and pipeline levels illustrated in Figures 1-3 are based on a calculation of the “down,” “flat” and “up” responses to each question and depict a combined or aggregate total of each quarter’s response levels. EquaTerra Advisor and Service Provider Pulse Survey Results - 1Q09 - Page 6

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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 ITO

59%

BPO

22%

Internal Imp.

Other IT Svcs

Other

15%

7%

5%

Figure 2

Advisors: Change in Demand by Service Delivery Model 12%

39%

9%

17%

6%

34%

35%

Down Flat Up

62%

49%

60%

56% 21%

BPO

ITO

Other IT Svcs

Internal Imp.

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 flow 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 in March 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 specific measures will complicate some specific 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, this level was in line with the survey average. • Just five percent of service providers cited a decline in pipeline growth. Service Providers: New Deal Pipeline Projections 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 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 profile of the service providers polled. Results are more a function of specific 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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Decrease

Flat

Increase

Aggregate

Figure 5

The final 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

Market Growth Market Contraction 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Advisors

Service Providers

Figure 6

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Economy’s Impact on Outsourcing Demand As these survey results are being published, the global economy is finally 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 flow 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 flow. EquaTerra has polled advisors and service providers over the past five 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 was down 13 percent from last quarter. Advisors were more likely than service 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 Environment’s Impact on Outsourcing 18% 32%

4%

5%

54%

51%

20%

24% 38%

22%

Little/no impact Slowing/rethinking outsourcing plans

47%

1Q08

Driving more outsourcing

58%

2Q08

42%

42%

45%

3Q08

4Q08

1Q09

Figure 7

EquaTerra sees that pent-up outsourcing demand created in the second half of 2008 is now starting to flow faster into the market. Buyers can no longer wait to significantly 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. Significant transformation in terms of dollars needed is being highly scrutinized as to whether it’s a want or a need.” –– “In some respects it has paralyzed decision making. Companies that are in serious trouble are having a hard time affording help. Those that can afford help are a bit paralyzed. But it looks like things are starting 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 we’re 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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–– “We’re observing significant 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 demand to learn more about outsourcing but extended drag in making final decisions; customer requirements are less focused on very specific 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 finish 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, flexibility and creativity in the sourcing process and in deal structuring, etc. Advisors ranked service providers on a one-to-five scale with one being providers are doing a poor job/are not at all responding to changing buyer needs and five 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-five scale. There were no major variations by advisor geography or functional coverage area.

Market Conditions: Impact on New Deals 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 influencing 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-five scale how different buyer responses are to market conditions relative to their outsourcing efforts (see Figure 8). Market Conditions: Impact on New Deals Pursuing deals focused on cost savings Pursuing deals that have short ROI timeframes Pushing SP's to finance/defer/absorb upfront costs Pursuing deals smaller in scope Adding new business w' existing SP's

Service Providers Advisors

Focusing more on onshore/nearshore Consolidating business w' large, tier one SP's Deemphasizing use of Indian SP's

1.00

2.00

3.00

4.00

5.00

V

Figure 8

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The most commonly cited response identified 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 the one-to-five scale. Advisors and service providers also agreed that buyers are more commonly pursuing deals that have short (<12 month) ROI time frames, scoring this option just

below 4.0. This trend is more prevalent in smaller deals and single functional and geographic areas than in larger, global and multi-tower deals where a 12-month ROI is unrealistic. There was consensus on buyers pushing service providers to finance/defer/ absorb any upfront change or transition costs. Service providers were strong in the opinion that buyers are more often adding new business with existing service providers instead of taking new business to market, highlighting the trend toward supplier consolidation and flight to quality suppliers. While the trend to de-emphasize the use of Indian service providers was not commonly cited overall, it was given greater weight by advisors in the Americas (3.14) than in EMEA (2.57).

Demand Trends by Functional Area EquaTerra advisors cited demand trends by functional area (e.g., F&A, HR and IT) as continuing in the same direction in 1Q09 as the past few quarters (see Figure 9). ITO was the strongest functional demand area, followed by FAO and HRO. HRO demand levels did improve for the first time in several quarters, signaling some increased levels of activity in this market segment. Demand for multi-process HRO (more than two processes outsourced simultaneously to the same service provider) remains weak, while demand for one- or two-process HRO remains stronger. Advisors: Demand by Functional Area ITO FAO HRO 1Q09 1Q08 1Q07

Procurement CC/CRM Other 0%

20%

40%

60%

80%

100%

Figure 9

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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 polled in any one quarter. Service Providers: Demand by Functional Area FAO ITO HRO 1Q09 1Q08 1Q07

CC/CRM Other Procurement 0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Figure 10

EquaTerra has seen both demand and supply grow for outsourcing services beyond general and administrative back-office 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 financial analysis, modeling and analytics. Some of these functions are specific to certain industries, such as drug development and clinical trial services in the pharmaceutical 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 financial analytics. Banking and financial services firms, for example, along with western pharmaceutical firms, face significant 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

Service Providers: Functional and Process Area Demand

Advisors: HRO Demand

Service Providers: HRO Demand

Payroll

Payroll

HR IT

Benefits

Benefits

HR IT

Recruiting/Talent Mgmnt 1Q09 1Q08 1Q07

Compensation Workforce Effectiveness Learning/Training

Learning/Training

1Q09 1Q08 1Q07

Compensation Recruit/Tal. Mgmnt Workforce Eff.

Other

Exp & Relo

Expatriate & Relocation 0%

20%

40%

60%

80%

100%

0%

Advisors: FAO Demand

20%

40%

60%

80%

100%

Service Providers: FAO Demand Accounts Payable

Accounts Payable

AR/C&C AR/C&C

General Accounting 1Q09 1Q08 1Q07

General Accounting

Travel & Entertainment

1Q09 1Q08 1Q07

Fin, Control, Risk Mgmnt Travel & Entertainment Decision Support

Finance, Control, Risk Mgmnt

Other 0%

20%

40%

60%

80%

100%

0%

Advisors: ITO Demand

20%

40%

60%

80%

100%

Service Providers: ITO Demand ADM

ADM

Infrastructure/Ops

Infrastructure/Ops

Packaged Apps Svcs 1Q09 1Q08 1Q07

Desktop Services

Packaged Apps Svcs

1Q09 1Q08 1Q07

Desktop Services Other

Networks/Telco

Networks/Telco 0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Dema Providers: d Service Procurement Outsourcing Demand

Advisors: Procurement Outsourcing Demand AP

AP

Strategic Sourcing

Order Mgmnt/Trans Processing

Order Mgmnt

Strategic Sourcing

Category Mgmnt

Mgmnt/Admin.

Req. & Approval

Category Mgmnt

1Q09 1Q08 1Q07

Fixed Assets Mgmnt/Admin.

Fin. Rep./Analysis

Fin. Rep./Analysis

Receiving/Inventory

Other

Req.Approval

Receiving/Inventory

1Q09 1Q08 1Q07

Fixed Assets

Other 0%

20%

40%

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60%

80%

100%

0%

20%

40%

60%

80%

100%

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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 Energy/Utilities, Oil & Gas

Banking, Fin Svcs, Insurance 1Q09 1Q08 1Q07

Govt (Fed, State, Local), Edu

Pharma/Biotech

CPG, Food/Bev, Retail, Wholesale 0%

20%

40%

60%

Figure 11

Service Providers: Demand by Industry Banking, Fin Svcs, Insurance

Manufacturing 1Q09 1Q08 1Q07

CPG, Food/Bev, Retail, Wholesale

Energy/Utilities, Oil & Gas

Govt (Fed, State, Local), Edu 0%

20%

40%

60%

80%

Figure 12

There are several key points to highlight relative to demand by industry. One is increased strength in demand in the banking and financial services industries. This is 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 and outsourcing.

Sales Cycle For the purposes of the Pulse surveys, the sales cycle is defined 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 portfolio Preferred 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 flow 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 quarter’s 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 flux (such as financial services), for the balance of 2009. Figure 13 illustrates sales cycle trends according to service providers polled in this quarter’s study. • Thirty-three percent of service providers indicated sales cycles were lengthening, up from last quarter, for the fifth straight quarterly increase. • Just 10 percent of service providers indicated sales cycles were shortening.

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Service Providers: Sales Cycle 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

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 profitability, 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 quarter’s study. • Seventy-six percent of service providers polled indicated that pricing pressure increased 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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

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 final 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 provider’s top resources. Service providers influence 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 are more closely assessing the risk profiles of clients they are pursuing and adjusting their pricing accordingly. Buyers in financially difficult 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 profiles 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 defined 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 buyer’s perspective, understanding trends in scope and contract value helps not only to determine how aggressively other organizations are pursuing outsourcing, but also how to define 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 flat to declining for the past two years. Figure 15 illustrates deal scope trends according to service providers polled in this quarter’s 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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Decreased

Same

Increased

Figure 15

Service Providers: Contract Profitability and Ability to Increase Scope A variety of factors impact service provider profitability, including deal scope, transition costs and time frames, and buyer pricing sophistication. Exchange rates and wage inflation also affect service provider profitability, particularly firms with extensive global operations. Service providers with a higher mix of remote/low-cost resources have been putting pressure on the profitability 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 profitability. This has resulted from buyer pricing pressure, more competition for business, buyer pull-back on more profitable discretionary services, and an increased focus on cost cutting over process improvement work. Figure 16 illustrates contract profitability trends according to service providers polled in this quarter’s study. The Pulse survey addresses profitability on existing contracts, not new deals in the pipeline. • Just 20 percent of service providers polled indicated contract profitability 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 profitability levels. There was no trending on scope based on type of service provider polled. Service Providers: Contract Profitability 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

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-five percent of service providers expected to increase scope in current accounts, up 24 percent from 4Q08, the second highest level recorded in the life of the survey. This bodes well for future deal bookings, as well as improved, or at least defended, profitability levels. • No service providers indicated scope would decline in existing accounts.

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Service Providers: Ability on Increase Scope 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

Decline

Remain Constant

Increase

Figure 17

Service Provider Capacity Service provider capacity is an important factor that influences other trends, such as pricing competitiveness, sales cycles and profitability. EquaTerra defines 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 today’s 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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4Q05

1Q06

2Q06

3Q06

4Q06

Constrained/Tightening

1Q07

2Q07

3Q07

4Q07

Unchanged

1Q08

2Q08

3Q08

4Q08

1Q09

Adequate/Increasing

Figure 18

Advisors: Service Provider Capacity, Pursuit 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2Q07

3Q07

4Q07

Constrained/Tightening

1Q08

2Q08

Unchanged

3Q08

4Q08

1Q09

Adequate/Increasing

Figure 19

Advisors: Service Provider Capacity, Delivery 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2Q07

3Q07

4Q07

Constrained/Tightening

1Q08

2Q08

Unchanged

3Q08

4Q08

1Q09

Adequate/Increasing

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 percent from 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 highest 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 17 percent 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 insufficient 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 quarter’s 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 sales or pursuit capacity, advisors and services providers continue to have differences of opinion. Service Provider Capacity 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 4Q05

1Q06

2Q06

3Q06

4Q06

Constrained/Tightening

1Q07

2Q07

3Q07

Unchanged

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

Adequate/Increasing

Figure 21

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Update on Existing Deal Structures and Outsourcing Governance Market Conditions: Impact on Existing Deals This section of the Pulse will review the impact current negative market conditions are having on outsourcing deals that are in flight (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 finds, for the most part, these predicted trends are more the exception than the norm and that most deals continue to move forward under previously defined 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-five 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-five 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 financial 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 identified buyer responses to market conditions. • Buyers were less commonly identified 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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Market Conditions: Impact on Existing Deals Opening up deals up to get better pricing Scrutinizing existing deals relative to risk Opening up deals up to change other deal terms/conditions Overhauling governance operating models

Service Providers Advisors

Investing more in governance Shifting more work onshore/nearshore Pulling work back offshore altogether

1.00

2.00

3.00

4.00

V

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 findings 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-five percent of advisors indicated conditions were having a minor negative impact and 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 impact on buyer outsourcing governance efforts and just six percent citing a major negative impact.

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Market Conditions: Impact on Outsourcing Governance (1) 100% 90%

15%

80%

44%

70% 60% 50%

65%

40% 50%

30% 20% 10%

20%

6%

0% Advisors

Service Providers

Major Negative

Minor Negative

No Material

Figure 23

There was a general consensus between advisors and service providers about how market conditions were negatively impacting buyer outsourcing governance efforts (see Figure 24). • The most common response cited by advisors (3.34 on the same one-tofive scale) was that uncertain organizational future state conditions are complicating pending renewal and renegotiation efforts. This was the second most common response identified by service providers after inadequate support from distracted executives and management (rated 3.39 by service providers and 3.24 by advisors). • Advisors were more likely than service providers to cite declines in the quality of service provider services and declines in the levels of service provider support and communications as problems created by current economic conditions. Market Conditions: Impact on Outsourcing Governance (2) Uncertain org future complicating renewal/renegotiation Inadequate support from execs/mgmnt Retained org, budget staff/cuts OG team budget/staff cuts Outsourcing deal out of sync with current ops Uncertainty over future SP stability/viability

Service Providers Advisors

Decline in the quality of SP services Declines in the levels of SP support

1.00

2.00

3.00

4.00

Figure 24

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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 success highlights 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 satisfied with the performance of their outsourcing service providers. Just 53 percent of buyers that assessed their outsourcing governance capabilities as weak were satisfied with their service providers’ performance.

Excellent

70%

Good

64%

u t

e

e

t

s/c t

ete c es to ep d

Sample #1 from EquaTerra European ITO Service Provider Performance and Satisfaction Study

Average

57%

Weak

53% e

t

c on

t t

r c pr

de ( )

Figure 25

Recent market events have made many buyers more nervous about global sourcing efforts. Terrorist attacks in India, the financial problems experienced by Satyam, and the global economic turmoil in general have made business-as-usual difficult, 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 quarter’s Pulse whitepaper, as well this webcast, for EquaTerra’s 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 marketspecific 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 next editions 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 satisfied, satisfied, or very satisfied 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 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

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 deals with 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 Life. Capita will take over customer service and other administrative duties relating to 3.2 million life and pension policies written by AXA Sun Life. • 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 five years with Deutsche Post World Net. Telefónica will offer mobile, fixed 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 (UK insurance). 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 Reader’s Digest. HCL Technologies will provide IT infrastructure and network services globally.

Service Providers: Current Deal Portfolio Status In the final section of the Pulse survey, EquaTerra asked service providers to profile 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 profiled. 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 AM

2% 9%

IM

3% 9%

EUM

15%

18%

3% 10%

19%

Very unsatisfied Somewhat satisfied

37%

30%

31%

Unsatisfied Satisfied

34%

34%

32%

3%

6%

5%

Somewhat unsatisfied Very satisfied

Figure 27

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Service Provider cancellations and now-renewals 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

More

Same

Less

Figure 28

Service Provider problem contracts 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09

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 inflows.

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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 clearly defined 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 flight 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

Demand Overall

Demand - By Service Model

Response

Total

Global

Americas

EMEA

Up

49%

Flat

41%

58%

47%

42%

42%

44%

41%

ITO

BPO

BPO & ITO

47%

43%

52%

39%

44%

43%

Down

10%

0%

9%

17%

14%

12%

5%

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

ITO

Other IT services

Internal imp. Service Provider Capacity Pursuit Service Provider Capacity Delivery

Economy

Market Conditions: Impact on New Deals

Up

49%

53%

50%

46%

54%

37%

58%

Flat

39%

47%

46%

29%

31%

41%

42%

Down

12%

0%

4%

25%

15%

22%

Up

56%

69%

59%

50%

51%

33%

76%

Flat

35%

31%

30%

40%

38%

53%

24%

Down

9%

0%

11%

10%

11%

13%

Up

21%

38%

29%

9%

20%

36%

13%

Flat

62%

63%

59%

64%

60%

55%

69%

Down

17%

0%

12%

27%

20%

9%

19%

Up

60%

73%

50%

62%

63%

67%

61%

Flat

34%

27%

41%

31%

26%

29%

39%

Down

6%

0%

9%

7%

11%

5%

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%

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%

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%

Adding new business w’ existing SPs

3.47

3.75

3.50

3.36

3.42

3.55

3.48

Consolidating 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 finance/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

Market Conditions: Impact on Outsourcing Governance

Market Conditions: Impact on Outsourcing Governance

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/ conditions

3.59

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

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%

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/renegotiation

3.34

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

Service Provider Responsiveness to Changing Buyer Needs

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3.01

2.57

3.12

3.12

3.06

2.90

3.00

2.99

3.36

2.93

2.91

2.87

3.00

3.17

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About EquaTerra

Contact Us

EquaTerra sourcing advisors 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 Pacific, we have deep functional knowledge in Finance and Accounting, HR, IT, Procurement and other critical business processes. EquaTerra helps clients achieve significant cost savings and process improvement with internal transformation, shared services and outsourcing solutions.

If you would like to know more about EquaTerra, please contact us. Europe/Asia Pacific +44 (0) 845 838 7500 [email protected]

Americas +1 713 470 9812 [email protected]

For details of all our locations visit www.equaterra.com/locations For more information on EquaTerra’s research efforts, please contact Stan Lepeak at + 1 203 458 0677; [email protected]

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