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New Delhi, Jan. 5 The global downturn is expected to impact the growth and margins of the vendors in the outsourcing space for the first 2-3 quarters of 2009, before picking up and ending the year on a stronger note as clients look to cut costs and improve revenue, advisory firm Tholons said.

According to its latest report, ‘Top ten trends in service globalisation — 2009’, the slowdown would also see reduced number of start-ups in the services sector as the focus shifts to sponsoring hard asset-intensive businesses.

“There are strong headwinds for vendors in the outsourcing space … It has become increasingly clear that the downturn is impacting revenue and we expect most large firms will see a decline in the quarter-on-quarter earnings,” it said.

Service providers have already started feeling the effects of decreased margins and employee downsizing, while buyers are reducing IT budget allocations for outsourcing engagements. This is evidenced by drying pipelines, cancelled bookings and increased pressure to deliver value beyond cost.

“Buyers will need to re-assess their outsourcing strategies and implement a better mix of multi-sourcing, combining nearshore and offshore models, while service providers will look to tap growing domestic markets such as China, India, Argentina, Brazil and even the US as a means to hedge against the volatility of existing offshore contracts,” Mr Avinash Vashistha, Global Managing Partner & CEO at Tholons, said.

Clients, with reduced IT budgets, are expected to turn more selective, demanding greater contractual flexibility and output- or result-based payment schemes.

Terming 2008 as a “tumultuous year for outsourcing”, Tholons said that although it continued to advise clients to remain cautious this year, it did not discount the opportunities and potential evident in the market.

It further said that the global downturn is motivating service providers to focus on recession-proof industries such as healthcare and education. “The healthcare industry globally has been a good adopter of global outsourcing in the last couple of years and we see this trend continuing on a steep curve as we look towards 2015,” says Dr Garima Vashistha, President (Healthcare) at Tholons.

Other sectors like manufacturing, retail and telecom would start to look attractive as they come under pressure to reduce cost drastically to survive.

Consolidation in the financial sector is inevitable due to the global financial crisis. Increased merger and acquisition activity in the financial sector would also mean that merged entities would want to integrate their outsourced services — leading to an increase in spending for integration projects — software applications, data centre consolidation and tighter integration of other operational platforms.

With financial institutions such as Lloyds TSB/HBOS and Bank of America/Merrill Lynch merging, service providers would also find themselves bidding against incumbent transnational rivals like IBM, Accenture and HP-EDS for several large-scale integration contracts (valued anywhere between $500 million and $1 billion over five years). Pricing pressures would kick in as suppliers scramble to meet their quarterly target through the year.

Large India-based providers are expected to see EBITDA margins plunge below 20 per cent over the next three years, as they move more IT projects offshore (mostly to India), and struggle to balance operations with rising wages, Tholons said.

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