Outsourcing Gets Crimped by Recession

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Despite the softness crimping overall sales in the industry, some providers, including Accenture (ACN), IBM (IBM), and Infosys (INFY), are holding up relatively well. In the fourth quarter, Accenture booked $2.24 billion in new outsourcing deals. That was a sharp decline from the very strong period that ended Aug. 31, but wasn't far from the year-earlier quarter, when new outsourcing bookings came in at $2.5 billion. There was a "deer in the headlights" effect among corporate clients during the economic meltdown in September and October, but business started to pick up at the end of the year, says Kevin Campbell, group chief executive for outsourcing at Accenture.

Companies Try Outcome-Based Outsourcing

In January, IBM and Infosys both beat quarterly earnings expectations. In the fourth quarter, IBM added new outsourcing clients including Sara Lee (SLE), Korean Air, LendingTree (TREE), Fluor (FLR), and others. Even though Infosys exceeded analysts' forecasts, the company did ratchet down its growth outlook. The company now expects sales growth of 12% to 13%, down from an earlier forecast for growth of 19% to 21%. And while much of the revision relates to currency fluctuations, it's partly related to price pressure. During a Jan. 13 earnings conference call, the company said some customers were facing trouble and asking for price reductions. "We are seeing at least in some occasions, competitors cutting price globally and offshore," said Infosys COO S.D. Shibulal.

In the interest of lowering the cost of outsourcing, some companies are moving toward what's known as outcome-based outsourcing, which is based not on the number of hours it takes to do a task but rather on the results achieved. Norwegian Cruise Line went this route when it signed a five-year deal in September for IBM to manage its reservation system. CIO Vincent Cirel says he wanted to lower the total costs associated with that system. A team of eight to 10 people from both companies spent several months creating a deal that would include service-level agreements yet be flexible enough to meet the company's needs, Cirel says.

Part of the agreement was the ability to dial the work up or down in light of demand. "As fate would have it, about three to four weeks after we signed the statement of work, the economy ran off a cliff," Cirel says. "We didn't plan to test it in this way or in this short a period of time, but the statement of work passed the test," giving Norwegian Cruise Line flexibility to ratchet down its demands. Using knowledge gleaned from working with Norwegian Cruise Line, IBM says it may create similar reservation services for other companies that would let the customer pay for the service on a per-reservation basis, says Bruce Speechley, a partner in global business services, airlines, and hospitality at IBM.

As Oceaneering's Budny was cutting back some outsourcing work, he also planned to leave some tasks with his offshore outsourcing provider, Satyam. Then, on Jan. 7, Satyam's chairman resigned after admitting to financial fraud. "We didn't see it coming," says Budny, who adds that Oceaneering always enjoyed a good relationship with Satyam. Satyam's chairman was later arrested and the government of India stepped in to replace its board of directors. Still, that day set in motion a 10-day scramble as Oceaneering employees drafted a Plan B. While some Satyam clients are still waiting to see how the situation unfolds, Oceaneering ultimately decided to find another partner. Says Budny: "There's too much uncertainty and we weren't willing to put ourselves at that level of risk."

King is a writer for BusinessWeek.com in San Francisco.