FSN: Global outsourcing market down by almost a third as US market and BPO uptake slows

Global outsourcing market down by almost a third as US market and BPO uptake slows

30th April 2007
The latest quarterly index from TPI, the outsourcing advisory firm shows that the world-wide outsourcing market declined by almost one-third (31%) when comparing the total value of broader market contracts let in the first quarter of 2007, $17.6 billion (€14 billion) with the first quarter of 2006, $25.4 billion (€20.3 billion). Indeed this year saw the lowest total contract value of outsourcing deals in any first quarter of the past five years.

Duncan Aitchison, Managing Director of TPI, commented, “Contract awards world-wide have got off to a much slower start this year than traditionally seen in the first quarter, portending a softer outsourcing market for all of 2007, continuing the slowdown of the global outsourcing market which first became apparent in the second half of last year. Whilst, the decline in the total value of deals done is in part due to shorter and therefore lower value contracts, this is not exclusively the case. The US 's current reluctance to outsource is also a contributory factor.”

The downturn in overall outsourcing contract activity is exemplified in the decline of Business Process Outsourcing (BPO). 2007 has experienced the smallest number (29) and lowest total value, $2.8 billion (€2.3 billion) of BPO contracts greater than $25 million (€20 million) awarded in the first quarter in almost five years.

Duncan Aitchison commented, “The adoption rate of BPO appears to have hit a soft patch and we expect it to grow at only 2% this year, which is well off the double-digit pace we have witnessed in previous years. Partly this is due to customers' concerns about whether BPO is meeting their needs. Also, buyers are prolonging their decision-making on some processes, particularly as they wait to hear more positive reviews from the early adopters of Human Resources Outsourcing (HRO). We expect this to continue throughout 2007 with the marketplace becoming more competitive as provider capability expands in 2008 and beyond.”

Despite a particularly slow first quarter, TPI's projections still show modest growth in the overall size of the outsourcing market in 2007 as a whole in terms of annual contract value. TPI is predicting approximately 4% growth across 2007, driven by a 4.4% year-on-year increase in ITO (IT Outsourcing).

Within the overall decline the TPI Index also shows a dramatic shift in the focus of the global outsourcing market away from its traditional US heartland and deeper into both Europe and Asia-Pacific. Whilst market activity in the US has declined, Europe is experiencing continuing growth.

$5.2 billion (€4.2 billion) of outsourcing deals were struck in the Americas in the first three months of this year, a decrease of some 70% on the first quarter of 2006. Indeed, the 27 contracts awarded there during the first three months of this year represent the fewest quarterly contract awards since 2001. By way of contrast, the total value of contracts awarded in Europe , $9.7 billion (€7.7 billion) was up 67%, while Asia-Pacific experienced a 30% increase in the value of first quarter deals from $2.1 billion (€1.7 billion) in 2006 to $2.7 billion (€2.2 billion) in 2007.

Aitchison, commented, “This shift in market activity from the Americas to Europe can principally be explained by the US 's far greater maturity as an outsourcing market. Europe and Asia-Pacific are newer to outsourcing and their markets therefore currently have more potential to grow. That said, the significance of these developments from the perspective of outsourcing providers should not be underestimated. Europe will become increasingly important to the service provider community.”

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