Economy Still Holding Outsourcing Market Back
July 24, 2009
HOUSTON, July 21 /PRNewswire/ — TPI, the largest sourcing data and
advisory firm in the world and a unit of Information Services Group Inc.
(ISG) (Nasdaq: III, IIIIU, IIIIW), a leader in the information-based
services industry, today released second-quarter and first-half global
market data showing that outsourcing activity continues to be constrained
by difficult macroeconomic conditions, despite its potential to soften the
impact of the recession through cost savings and efficiency gains.
The TPI Index, which measures commercial outsourcing contracts valued
at $25 million or more, found that the total number of contract awards fell
7.5 percent from the first quarter to the second quarter, to 135. While
total contract value (TCV) rose about 5 percent sequentially to $20.5
billion, Annualized Contract Value (ACV) – TCV divided by the duration of
the contracts – fell 5 percent from the previous quarter to $3.6 billion.
Compared with the first six months of 2008, which saw record levels of
sourcing activity, the market in the first half of 2009 awarded 11 percent
fewer contracts with 22 percent lower TCV and 28 percent lower ACV. Driving
the declines were a reduction in mega-deals in Europe as well as lower
spending globally on business process outsourcing (BPO).
On the bright side, demand for IT outsourcing (ITO) remained stable
both sequentially and year-over-year in the Americas and Asia Pacific. In
addition, several industry verticals, including Diversified Financials,
Transportation, Retail and Telecom, increased their adoption of outsourcing
during the first half of 2009.
“The first half of 2008 was extremely strong for the outsourcing
industry, which makes year-over-year comparisons tough,” said Mark Mayo,
Partner and President, TPI Global Resources Management. “In addition, over
the past six months, companies have been more tentative and tactical about
making sourcing decisions as they try to navigate these challenging
economic times. Nonetheless, recently we have seen some very early signs of
stabilization in ITO markets, especially in the United States, which gives
us some encouragement that we may be seeing a bottom to the current slump.”
The TPI Index provides a quarterly snapshot of the global sourcing
industry for clients, service providers, analysts and the media. Now in its
27th consecutive quarter, the TPI Index is the authoritative source for
marketplace intelligence related to outsourcing transaction structures and
terms, industry adoption, geographic prevalence and service provider
metrics.
TPI INDEX HIGHLIGHTS
Second-quarter results indicate that the outsourcing market has entered
into a period of sustained activity, albeit at a significantly lower level
than just a year ago. In fact, to match the market’s results for the full
year of 2008, the industry would need to sign $53 billion in TCV during the
second half of this year, which would be a record performance and in TPI’s
view, is unlikely to happen. Full-year TCV could fall below $80 billion,
which has not happened since 2001, another year of global recession.
The slowdown in the market is obvious in the precipitous decline in
demand for BPO. The number, TCV and ACV of BPO contracts are all lower in
first-half comparisons than in any of the past five years. The BPO market
is displaying weakness in all regions and across functions, including Human
Resources, Finance & Accounting, Facilities Management and Financial
Services Outsourcing. The decline appears to extend beyond a response to
the recession, so BPO may be a swing factor in considering the timing and
size of any eventual surge in contract activity.
By contrast, ITO has held steady, stabilizing the broader market. In
the first half, TCV in this segment was in line with pre-2008 levels,
although the average TCV has dropped considerably. The ITO market has
benefitted from strength in Network Services, which has accounted for about
half of the mega-deals and mega-relationships so far in 2009, as well as in
the Americas and Asia Pacific. Compared to the first half of last year, the
TCV of ITO awards is up 6 percent in Americas.
INDUSTRY SECTORS
The second quarter also revealed some telling industry sector and
geographical trends. Not surprisingly, the banking sector, traditionally a
heavy adopter of outsourcing services, has slowed its activity
significantly in the wake of last year’s financial crisis. Oil & Gas, Food
& Drink and Consumer Durables, to name a few, have also slumped in 2009.
But at the same time, the Diversified Financials, Transportation,
Retailing and Telecom sectors have been increasing their adoption of
sourcing strategies. For instance, the 26 contracts awarded by
Transportation companies in the first half of 2009, with buyers in Europe,
Middle East and Africa leading the way, represented 44 percent
year-over-year growth. In Telecom, the number of contracts did not change
substantially, but TCV and ACV each doubled year-over-year. Those four
sectors together account about 37 percent of the number of contracts and 47
percent of TCV awarded this year.
REGIONAL DIFFERENCES
The Q2 TPI Index revealed significant differences among regions.
Outsourcing markets in EMEA dragged down the global market, with just 53
contracts with a TCV of $8.8 billion. Both figures were among the lowest
the region recorded over the last ten quarters.
Weakness in EMEA was offset by strong performance in Asia Pacific,
which had its second best quarter ever with TCV up 200 percent over a year
ago. Uncharacteristically, two of eight mega deals and six of 15 mega
relationships have been awarded in the region thus far this year.
In the Americas, the TCV performance has been more evenly distributed
during recent quarters than in Europe. However, in the second quarter, the
Americas witnessed a sequential loss of 35 percent by TCV, and only one
mega deal has been signed in the region since 2009 began.
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