By Daniel Hunter

Organisations are retreating behind the wall of economic uncertainty and holding back from renewing contracts for core outsourced services. According to KPMG’s latest global pulse survey, demand is expected to fall in the last half of 2012, matching the lower-than-expected levels of growth experienced earlier in the year.

According the data, which is based on the views of senior executives in some of the world’s largest global business and IT service providers, little over half (51 percent) expect to see customer demand increase between now and the end of December 2012. It appears that a trend is emerging as the figure represents a drop from 61 percent who were optimistic when polled in Q1, 2012 and a steep fall from 74 percent, this time last year.

The declining confidence surrounding anticipated future demand for outsourced services stems from respondents’ experiences over the past three months. Today’s data reveals, for example, that 61 percent believe there is room for optimism about business prospects, but this figure has fallen from 68 percent, at the start of the first Quarter.

Perhaps more worrying is news that 3 percent of respondents also admitted their pipeline of growth fell during Q2, 2012 — the first time there has been negative growth in the outsourcing marketplace since the end of Q4 in 2011.

“Negative market conditions in the Euro Zone continue to have a detrimental impact on business confidence as uncertainty forces buyers to delay decisions," says Shamus Rae, partner in KPMG Management Consulting’s shared services and outsourcing advisory team.

"The knock-on effect is also being felt as organisations maintain a tight rein over discretionary spending. Amongst those business customers who are renewing contracts, cost reduction has regained its position as the primary driver to outsource key services, but the ongoing market volatility is driving organisations to focus on short-term initiatives rather than projects that will boost performance over the longer-term."

The survey found that a desire to reduce operating costs has regained top spot when respondents were asked what drives outsourcing decisions amongst their client base (58 percent). 52 percent also cited a need to create greater financial flexibility and 35 percent focused on the access they would gain to external skills, talent and resources.

It also appears that a shift is emerging when it comes to the nature of outsourced services demanded by clients. On a 5-point scale, service providers scored ‘near-shoring’ as the most popular at 3.70, followed by ‘off-shoring’ at 3.61. Domestic shared service centres are also gaining in popularity, with 42 percent of respondents claiming an increase in customer demand for a pooling of available talent and services.

“There seems to be a popular movement and sentiment around the ineffectiveness of traditional approaches to outsourcing," Rae added.

"We are increasingly seeing a drive towards keeping things closer to home and onshore as firms look for ways to manage their outsourced teams more effectively, keeping a tighter control over them and the costs. It’s a move which should see an improvement in the state of the outsourcing industry over the long-term.”

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