Outsourcing uptick result of slow economy

Economic uncertainty apparently has companies rushing to outsource, pushing volume and dollar amounts to record highs in the first half of the year, according to advisory firm TPI.

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Are CIOs and their companies running scared? Hardly. Although an uptick in outsourcing deals in the past six months makes it seem that way.

Advisory firm TPI, which tracks large outsourcing deals, reported yesterday that the number of outsourcing contracts awarded in the first half of the year is the highest it's been in more than 10 years. The value of those contract deals -- totaling nearly $49 billion -- is on a trajectory to eclipse that for all of 2004, the most prolific year since TPI began publishing its quarterly index six years ago.

"Companies across industry segments are expressing their concerns regarding the uncertain business conditions by taking steps to reduce operational costs, and the outsourcing industry is benefiting," said Peter Allen, partner and managing director at The Woodlands, Texas-based TPI, a division of Information Services Group Inc.

Allen, speaking to clients and reporters yesterday in a conference call, said the run-up in deals began at the end of 2007 and shows no signs of slowing.

While the immediate concern is cutting cost, Allen said the increase in the number of deals also reflects the heightened need for companies to be able to "dial up and dial down the provision of corporate back office services" in response to business circumstances.

"In the current recessionary markets, the urgency is to reduce costs. Conversely, companies are looking to establish the means to expand capacity and capability when the eventual return to growth occurs," Allen said.

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Outsourcing EMEA outpaces Americas

The results are in sync with analysis from Gartner Inc. earlier this year predicting strong growth in offshoring, as well as from Forrester Research Inc. analyst Andrews Bartels, who expected outsourcing to hold its own, even as other segments of IT budgets got whacked.

In his blog yesterday, Allen expanded on the results. He notes that telecom and manufacturing showed strong activity, surpassing the sum value of contracts in 2007 in the first half alone. Business process outsourcing (BPO) saw more contracts as measured in both total and annualized value than in the past three years, while human resources outsourcing and finance and accounting "remained sluggish." Also, both India-heritage and telecom providers "came into view as substantial contenders" for multiple contract awards.

Certainly, Tata Consultancy Services Ltd., the largest of the Indian outsourcing firms, is capitalizing on a skittish business class. Revenue for its first quarter, which ended June 30, grew 20% year over year. The company reported 35 new clients in the first three months of its fiscal year, as well as 12 large engagements, three of which exceeded $75 million.

Tata also noted the "growth opportunity" in telecom, "traction" in the manufacturing sector and demand for BPO services in the retail sector.

EMEA driving deals

During the last three months, 146 contracts were awarded in the global outsourcing industry, valued at $25.6 billion in total contract value (TCV) and almost $5 billion in annualized contract value, or the value of a contract divided by its duration, TPI said. In volume and value, this was the strongest second-quarter performance since 2000. Additionally, each of the past three quarters has topped the $20 billion in total contract value mark, making up the best three-consecutive quarter performance ever, according to TPI.

"In the current recessionary markets, the urgency is to reduce costs."
Peter Allen
partner and managing directorTPI

The 282 contracts awarded in the first half of the year represented $49 billion in total contract value, a 24% increase over the same period a year ago. A major factor in the first half's record performance, TPI said, is the high number of "new scope" contract awards, or awards that factor out restructurings of existing deals. This marked the largest year-over-year increase in new deals in four years, with the total contract value in this segment rising roughly 26% and the annualized amount increasing 43%, according to TPI's analysis.

Europe, the Middle East and Africa (EMEA) showed the strongest market activity, with the total value of outsourcing contracts jumping 58% -- an increase due mainly to the growth in the size, not the number, of deals, Allen said. While the Americas and Asia Pacific regions did not show a large increase in market activity, by contrast, they experienced 58 percent more TCV in the first half of 2008 in comparison to the same time frame in 2007, significantly contributing to the global TCV record. This was due to greater average contract size in EMEA rather than a surge in the number of contracts. Ten of the 13 mega deals -- contracts in which the total contract value is $1 billion or more -- came from the EMEA region.

 

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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