Outsourcing Down 11%

July 22, 2009
TPI Index shows total contract value down 22%

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, according to TPI, a sourcing data and advisory firm.

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% from the first quarter to the second quarter, to 135. While total contract value (TCV) rose about 5% sequentially to $20.5 billion, Annualized Contract Value (ACV) -- TCV divided by the duration of the contracts -- fell 5% 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% fewer contracts with 22% lower TCV and 28% 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 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 years 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 (EMEA) leading the way, represented 44% 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% of the number of contracts and 47% of TCV awarded this year.

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% 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% by TCV, and only one mega deal has been signed in the region since 2009 began.

"Despite these bright spots and some signs of a pickup in early-stage market activity as we enter the third quarter, the balance of 2009 is likely to remain challenging and we do not expect total contract awards and TCV to match 2008 levels," Mayo said. "Yet the potential return on investment from outsourcing hasn't changed. Successful outsourcing can create tremendous value for many buying companies."

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