TPI, Outsourcing, Global, Market

TPI’s overview of the 2005 outsourcing market and 2006 projections

15 Jan 2006 | (News)

Overview and significant statistics

TPI, Inc., the world's leading sourcing advisory firm, today announced its year-end market observations in the TPI Index, a quarterly report on the state of the global outsourcing industry. The views in the TPI Index are based on TPI’s direct client experience, perspective on the industry, TPI data and available market statistics from more than 300 sources.

Generally the outsourcing market was flat in 2005 compared to 2004. A surge in mega deals during December made the fourth quarter the largest in Contract Value (TCV) since the fourth quarter of 2002; but for the year, TCV was down slightly.

2005 was remarkable for an unprecedented concentration of contract restructurings, which represented 24 percent of Total TCV in the broader market compared to a historical average of 15 percent each year. A significant number of mega deals involved restructuring.

Increased competition drives market and restructurings

TPI’s analysis reveals that 325 deals are due for renewal during 2006 and 2007, representing over a fifth of active contracts.  The service providers most heavily affected are IBM and EDS, with a combined share of $50 billion in contracts coming up for renewal.

Duncan Aitchison, Managing Director of TPI, commented:

“Although historically, incumbent providers have tended to be retained almost as a matter of course, the increasing level and diversity of competition, coupled with a trend towards selective or single process outsourcing all mean that providers cannot rest on their laurels.  Client retention will increasingly depend on an incumbent’s ability to offer a competitive proposition.  This could mean significant changes in price and scope from the original contract.”

During TPI’s conference call on January 12th, Mr. Aitchison expounded that with continued competition, especially from Indian providers and pure-play BPO providers such as Hewitt and Convergys, clients are expecting better productivity and cost improvements.

According to TPI, in order to maintain a bullish perspective on the BPO market, the BPO providers must make good on the promise of higher reliability, and higher productivity.

Offshoring

TPI advised on more offshore contracts than ever, and this trend is contributing to
increasing service-provider diversity and competition. European firms are becoming a bit more comfortable with Indian and European providers, as the Big Six share of contracts dropped from 46% in 2004 to 42% in 2005. India-based providers have doubled their market share over the last year. The secret of their success: They start small, often providing project support service from which they expand into broader and bigger outsourcing.

The Big Six is copying this formula by going small – starting relationships for a specific service from which their relation could grow. Another response has been to open shop in India, China and other emerging locations.
 

Projections

On an annualized revenues basis, TPI sees the overall commercial outsourcing market as flat driven by continued declining growth in IT Outsourcing (ITO) value. If trends continue, TPI predicts that 2006 and 2007 will witness the first years for absolute decline in overall revenue derived from commercial IT outsourcing. However, a healthy growth rate for annualized revenue is projected for BPO at between 10 and 15 percent in 2006.

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