The global economic climate had a distinct effect on the outsourcing expectations and decisions made by insurers and financial services organizations in 2010. So says a report issued this week by San Francisco -based law firm Morrison & Foerster, LLP. In its annual “Global Sourcing Trends” report, the firm includes survey responses from its Global Sourcing Group lawyers in Asia, Europe and the United States to create a state of the outsourcing market across a variety of vertical markets.

It’s no surprise that as insurers sought to recover from financial woes brought on by the 2008-2009 economic crisis, they were weary of entering into new long-term outsourcing arrangements. Outsourcing in 2010 was flat over the year prior, and those deals that were made were largely restructuring of old deals, notes the report’s authors, Alistair Maughan (London), Chris Ford (Washington, D.C.), and Nigel Stamp (Hong Kong).

Yet the value proposition of outsourcing, namely cost-cutting, has evolved into one of broader benefits—and expectations. Those expectations will put a new onus on service providers for innovation, service quality and value for the money, say the report’s authors. Further they predict that as innovation takes center stage, so will the obstacles to its successful achievement; service provider selection, contracting for innovation, and paying for innovation.

“The worlds of outsourcing and financial services regulation will continue to intertwine ever closer,” says the report.

Of primary concern, say the authors, is capital adequacy requirements for banks and insurance companies imposed through Basel II implementation and forthcoming Solvency II and Basel III requirements. The increase in regulatory requirements will result in insurers looking even more closely at the integrity of the outsourced service providers with whom they contract. “Most immediately, there will be increased emphasis on counterparty risk and the effect on banks’ and insurers’ capital; and more interest from regulators in outsourcing service providers,” notes the report.

Cloud-based solutions continue to grow in importance in the outsourcing market but concerns about data security and data privacy in the cloud remain high. Customers are now demanding that security be built into cloud services, and the market is driving the emergence of highly secure and trusted cloud services. “Private clouds” have gained popularity, especially in regulated industries where security and risk concerns may deter companies and their regulators from moving to genuine “public clouds.”

And where will the biggest deals be cut? In the “Global Outsourcing Trends” report, IBM notes that BPO activity in the Philippines exceeded BPO activity in India. This is a sign that outsourcing continues to become more global, migrating to areas where buyers can take advantage of labor arbitrage, say the authors. Countries such as South Africa are also making a push into the market by changing laws and granting incentives that will reduce costs for companies seeking to outsource there. Meanwhile, established outsourcing destinations such as India are seeking to move up the “sourcing food chain” to retain their piece of the outsourcing market.