Global Sourcing Takes a Hit from COVID-19 as GBS Activity Decreases 48% in Q2, Reports Everest Group

Q2 results are in, and Everest Group reports the Global Sourcing industry is suffering from the negative business impacts of the COVID-19 pandemic.
Service providers see declining revenues and margins; cybersecurity, desktop and mobility services gain traction as enterprises adapt to work-from-home.
Although overall outsourcing activity ticked upward slightly (2%) for the quarter based on the number of deals signed, service providers reported a decline in both revenues and operating margins.

Q2 results are in, and Everest Group reports the Global Sourcing industry is suffering from the negative business impacts of the COVID-19 pandemic.

Two trends illustrate this: First, the worldwide setup of Global Business Services (GBS) centers, also known as Global In-house Centers (GICs), fell sharply (more than 48%) as offshore/nearshore activity dropped 46% and onshore setups dropped 52% for the quarter. Second, although overall outsourcing activity ticked upward slightly (2%) for the quarter based on the number of deals signed, service providers reported a decline in both revenues and operating margins.

In offshore and nearshore locations, GBS market activity declined from 44 in Q1 to 24 new setups in Q2. In onshore locations, GBS market activity decreased from 33 new setups in Q1 to 16 in Q1 2020. New center setup activity in India reached an all-time low, after seeing only 8 new setups in Q2 as compared to 16 in the previous quarter.

Based on financial reports from Q1 2020, the consolidated revenue and operating margin of service providers witnessed a decline, -1.5% and -21% respectively, in comparison to the previous quarter.

“The global services industry is certainly feeling the pain of the economic downturn caused by COVID-19,” said H. Karthik, partner at Everest Group. “Enterprises and service providers functioning in sectors such as travel and hospitality, aviation, retail, automotive and manufacturing sectors have been hit the hardest in this quarter due to extremely low demand and supply constraints. Further, delays in new project renewals and cancellations of ongoing outsourcing projects have been witnessed in a number of cases. This has been followed by cost optimization measures that included layoffs for several enterprises and service providers.

“However, governments across the world have announced stimulus packages and relief measures,” continued Karthik “The G20, for instance pledged to infuse over US$5 trillion to support economies and protect workers and businesses. This infusion of support provides hope for recovery, and we continue to expect that significant containment in the spread of the virus will lead to further recovery of sourcing activity as lockdowns and travel restrictions can be eased.”

These global sourcing trends are detailed in Everest Group’s recently released Market Vista™: Q3 2020 report. The report shines a spotlight on transaction trends and outsourcing deals, GBS-related developments, offshoring dynamics, location risks and opportunities and key service provider developments.

Highlights of the Market Vista Q3 Report:

Demand for desktop services is continuously gaining traction as firms across the globe adapt to a work-from-home model. There was also a surge in demand for mobility services as enterprises are leveraging on-demand applications to increase their online presence amid the COVID-19 pandemic.
As the world faces increased risk of cyberattacks due to a shift in the working pattern, service providers are gearing up their investments in the cybersecurity space, yielding an increase in the number of cybersecurity-focused acquisitions, deals and new products.
The Technology & Communications vertical recorded the maximum increase in the number of transactions, owing to an increase in deals across the telecom industry. The government vertical, buoyed by deals in North America, also saw an increase in deals. The Banking, Financial Services & Insurance sector as well as the manufacturing, retail and healthcare sectors saw declines.
The share of digital-focused new centers saw a sharp increase in offshore locations and remained stable at onshore locations in Q2 as compared with Q1 2020. The Advanced Automation segment (which includes artificial intelligence, machine learning and other cognitive technologies) continued to lead across both regions. Activity was largely driven by India and China in offshore/nearshore locations and by the United States in the onshore region.

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