TPI, Trends, Q307

TPI Index Reveals Fewer Outsourcing Contracts Awarded in Third Quarter

18 Oct 2007 | (Survey)

In mid October, 2007, TPI released its quarterly analysis of the global commercial outsourcing industry for the third quarter of 2007 through its TPI Index report, the source for comprehensive marketplace intelligence on sourcing. The TPI Index tracks and analyzes trends in transactions awarded by industry, geography and service provider, through commercial contract awards valued at a total contract value (TCV) of $50 million and greater.

Through the first three quarters of 2007, the aggregate global number and value of these contracts have declined when compared to the same period in 2006. For this same period, number of contracts awarded in the sourcing industry globally declined 16 percent compared to the first three quarters of 2006. TCV attributable to contracts valued $50 million or greater, approximately $48 billion for the first nine months of 2007, was 17 percent lower than the comparable period in 2006. Annualized Contract Value (ACV) involving contracts valued $50 million or greater also decreased 18 percent year-over-year. In the Americas, a shift toward transactions with smaller contract values and shorter durations as well as fewer “new scope” transactions (contracts in which no prior relationship existed) resulted in a decline in the number of contract awards involving TCVs of $50 million or greater. New scope transactions were down roughly 43 percent in the Americas in comparison to the same time last year.

For the first nine months of 2007, demand for outsourcing services remained robust in Europe, the Middle East and Africa (EMEA) and Asia Pacific. New scope awards in Asia Pacific in increased value 72 percent from last year fueled by India and China. Europe registered a 36 percent increase in new scope awards year-to-date 2007 compared with the same prior year period.

Industry-wide average TCV has increased in EMEA to $26 billion during the first nine months of 2007 compared with $22 billion during the same 2006 period. For the first nine months of 2007, Europe accounted for more than a 50 percent share of the global Broader Market contracts signed for the first time. The Asia Pacific region increased its overall TCV by roughly $1 billion year on year due primarily to a nearly doubling in the value of new scope contracts.

One of the more important underlying trends identified in the TPI Index included a shift toward more frequent use of the strategy of contracting for effort rather than outcomes for applications-related and Business Process Outsourcing (BPO) contracts. This trend was particularly pronounced in the Americas region. Clients in the Americas are more often awarding contracts for access to labor at favorable pricing, rather than contracting for defined services through the construction of an outsourcing agreement.

In addition, major India-based providers have seen their Americas-derived revenue grow by 37 percent, on average, on a year-over-year basis despite the slowdown in outsourcing contract awards in the Americas. India-based service providers are capturing opportunities at the lower end of the outsourcing contract-value spectrum. TPI has reported that many of the multi-national service providers are also participating in the new battle for the increasing number of smaller transactions.

“The industry is growing and evolving in real-time. Service providers are offering an increasing number of capabilities in a growing number of geographies. Those with a strong offshore footprint and niche expertise are capitalizing on the Americas’ current lean towards smaller-sized contracts,” noted Peter Allen, partner and managing director of Market Development at TPI. “42 percent of the transactions we supported for our clients so far this year are less than $25 million compared to only nine percent five years ago. In addition, the overall demand for products and services we see in the market place is growing.”

Although the number of mega deals in 2007 remained the same as in 2006, TCV has declined from $17 billion in 2006 to approximately $12 billion in 2007. In addition, the number of mega relationships awarded year-to-date was down roughly 33 percent from 2006 levels. Mega relationships in the Americas declined from 22 for all of 2006 to four in 2007 year-to-date. Conversely, the regions of Europe and Asia Pacific are both on pace to meet or exceed their 2006 numbers for mega relationships.

Business Process Outsourcing (BPO) has continued to demonstrate sluggishness in contract awards. With 27 BPO contracts signed in the third quarter at a TCV of $4 billion, this segment of the market was down quarter-over-quarter. Sixty-six BPO contracts, worth approximately $11 billion to date, represent a year-over-year decline. While BPO is not exhibiting the growth the industry expected, its growth is contributing more to the Americas than to Europe or Asia Pacific. In fact, the Americas remain the predominant region to adopt BPO – by both number and TCV.

To find out more about important industry trends as well as new opportunities that are emerging for all industry participants, please visit TPI’s blog hosted by Peter Allen (www.considerthesourceblog.com) and join in the discussion.

To view past and current TPI Index presentations that detail and provide informed and objective transparency to the rate and form of the adoption of outsourcing, please visit www.tpi.net/knowledgecenter/tpiindex/.

About TPI
TPI is the founder and innovator for the sourcing advisory industry, and the largest sourcing advisory firm in the world. We are expert at a broad range of business support functions and related research methodologies. Utilizing deep functional domain expertise of accomplished industry experts who possess extensive practical experience, TPI collaboratively works with organizations to help them optimize their business operations through the best combination of insourcing, offshoring, shared services and outsourcing. For additional information, visit www.tpi.net.

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