Q&A: EquaTerra 3Q09 Advisor and Service Provider Pulse Survey Results EquaTerra's webcast presentation of 3Q09 Pulse Survey results generated several questions which were not addressed in the event. Moderator Stan Lepeak, EquaTerra's Global Director of Research, provides answers here. Q: In the "new normal" period we are in now, are you seeing a shift to mid-tier service providers by large buyers, from, say large India-based service providers? Or to large but niche service providers, in terms of more agile, new models of delivery? Most of the movement is toward larger, established multi-national and India-based service providers. It’s the smaller India-based and tier two western or regional firms that are losing out. Buyers are tending to consolidate business with larger players, seek economies of scale and better deal terms, build business with their most trusted firms and seek providers with more diverse skill-sets. That being said, in the competition between these larger firms, those with more agile and creative delivery models are in a better position to win more business. A niche provider can still win business, but it’s more likely in a space where there are not a lot of larger, established competitors. Buyers who are not viewed as desirable clients among the top tier providers may end up going to lower tier providers out of necessity. Q: The vendors said that 2009 budgets were finalized around March, and now we're already talking about 2010 budgets driving decisions. When are 2010 budgets expected to be finalized and what is EquaTerra's broad take on IT spending for 2010? To elaborate on what I covered during the broadcast, IT budgets will grow in the low single digits in 2010. Note that my opinion is based upon what I’ve read elsewhere as EquaTerra does not track overall IT spend projections — just those related to third-party services. I project that a larger portion of the IT budget will be spent on third-party services. So, outsourcing spend will grow faster than overall budgets as buyers look to do more with less via outsourcing. Q: ­Is there a change in the demand needs or preferences in this new, recent [market] increase?­ Regarding demand preferences, we see the same overriding focus, although to a lesser degree, on cost reduction and cost/investment avoidance that we’ve seen for the past year. There is some uptick in demand for more discretionary/project-based services like consulting, systems integration and application development work. Q: ­Is there a particular region/location in the US where the ADM market trend is increasing? Regarding US regional demand for application development and maintenance (ADM), we don’t get that granular in the Pulse survey. We do not see any major variations in demand at the broader regional level (i.e. US vs. Europe). Q: Regarding the comment on 'protectionism' not having a high impact — does this apply to the public sector?­ The public sector is the industry the most impacted by protectionist moves in both the US and UK, though there are stronger restrictions and more resistance to offshore and even out-of-jurisdiction outsourcing than outsourcing in general. There is also growing usage of third-party service providers for efforts that are a lot like outsourcing, even if called by another name. Examples include the use of a third-party service provider to help consolidate operations into a shared service center and then helping to manage and maintain that center over time, and bundling more support services into hardware and software purchases. Another countervailing factor is the extreme budget shortfalls faced by many public sector entities, especially at the regional and local levels, which leave few alternatives to outsourcing or reducing the levels of services provided or both. Q : ­In the UK ITO market renegotiations efforts, are buyers looking to push for cost reduction or trying to make service providers whole?­ On renegotiations overall, we’re seeing more buyers pushing service providers to become whole (i.e. abide by the terms of the contract) over any significant cost reductions, which service providers are resisting. Such gains could potentially lead to lower service levels. Q : Aggregate demand has always tracked fairly closely between providers and advisors. For the last three quarters, the gap has been significant and diverging further. Any comments as to why this might be?­ Yes, there has been a greater variance between the two groups over the past couple of quarters. There are several factors that play into this. One is timing. Advisors see demand in its more formative stages – during the planning and strategy and assessment stages — long before it shows up in any service provider pipelines. As such, the advisor view is more of a leading indicator. Secondly, the same demand may exist in multiple providers’ pipelines. This situation is more prevalent when deal flow is uneven, and has stops and starts before reaching the final down-select stage (as has been the case over the past year). There are also some deal types into which EquaTerra does not have full visibility (e.g., smaller or internally-sourced deals that don’t use an advisor or deals in geographies where EquaTerra is not well represented). Q : The trends look encouraging, however, how will this influence demand for services from new sourcing outlets (emerging markets)? Are there particular ones that are poised correctly vs. just an interesting outlet?­ I think emerging markets will benefit from current trends. We see more interest than ever in global/offshore sourcing and an ongoing interest and acceptance in alternative markets to India and Eastern/Central Europe. The key for markets, however, is service provider adoption more so than buyer preferences. Buyers increasingly look to service providers to identify the best delivery markets for their needs. This trend will only grow as the number of viable markets proliferates, buyers focus more on solutions than on how they are delivered, and continue to lose interest in establishing and operating their own captives. The markets that are the best positioned are those that attract the best service providers. Q : Does a service provider need to be the incumbent to be part of a new ADM project­? I think incumbents, especially the tier one multinationals and India-based service providers, are doing better at wining new ADM deals. We are seeing the award of new ADM business going hand-in-hand with consolidation of the existing ADM supplier base — rationalization efforts where the tier one providers are wining the majority of the business. A non-ADM incumbent has a better chance, however, if they are a major provider in an adjacent/related area of the business.