FSN: Offshore outsourcing set for further growth

Offshore outsourcing set for further growth

17th July 2006
A record level of outsourcing deals currently under negotiation involve offshoring, according to the latest Quarterly Index data from TPI, the sourcing advisory firm. An analysis of deals on which TPI is currently advising reveals that almost half (47 per cent) involve offshoring or ‘global service delivery'. This compares with 28 per cent at this point last year and represents a record high. Furthermore, where outsourcing contracts contain an offshore element, a far greater proportion of the work is moving offshore, averaging almost half (48 per cent) of the contract value, up from 27 per cent a year ago.

Duncan Aitchison, Managing Director, International with TPI, commented, “Contrary to speculation about rising levels of dissatisfaction with offshore outsourcing, our data predicts further growth in the value of work being moved offshore. In our experience, the approach of many companies to outsourcing has now matured to the extent that it is now no longer a question of whether to offshore, but rather which elements and to what degree.”

This growth in offshore outsourcing is further evidenced by impressive gains for the Indian service providers, whose market share has risen to 5.2 per cent of the total value of contracts signed so far this year, up from less than 3 per cent in 2005 and just over 1 per cent in 2004. Moreover, data relating to deals currently under negotiation (with which TPI is involved) points to a dramatic, almost threefold ( 284 per cent) increase in the value of deals for which the Indian providers are competing, compared with three months ago.

The size of deals the Indian service providers are winning is also increasing, up by 25 per cent from an average deal size of €101 million in 2005 to €126 million in 2006 to date. Of 11 contracts totalling €1.38 billion awarded to Indian providers this year, 9 are in Indians' traditional areas of strength in applications development and maintenance (ADM) or finance and accounting (F&A). However, data on the transactions on which TPI is currently advising reveals that the Indian providers are now being considered for remote IT infrastructure work as well.

Duncan Aitchison said, “The mature Indian vendors have achieved significant growth. Infosys, Satyam, Wipro, TCS and HCL are beginning to win larger and more varied deals. Our data suggests that there is no reason to doubt that this trend will continue, especially as buyers gain experience of working with them, and their confidence grows as a result.”

However, the Big Six of outsourcing – Accenture, ACS, CSC, EDS, HP and IBM – still dominate the offshore outsourcing market having won almost three quarters (73 per cent) of contracts in 2006 to date compared with 18 per cent for the Indian providers.

UK companies have signed outsourcing contracts totalling over €5.2 billion so far this year, up 9 per cent from €4.8 billion this time last year. The continued strength of the UK market contrasts with the rest of Europe , where demand for outsourcing has dipped. The total value of contracts signed in Continental Europe so far this year (€4.8 billion) is some 30 per cent lower than the equivalent figure at the same time last year.

Taking a global view, the UK accounts for 17.2 per cent of the value of contracts signed this year, Germany 6.6 per cent and the Netherlands 2.6 per cent, with no other country in Europe representing over 2 per cent of the global market.

Duncan Aitchison commented, “The likelihood is that the falling off of outsourcing in Continental Europe is nothing more than a temporary blip. Nevertheless, the UK is likely to remain the most significant buyer of outsourcing in Europe for some time to come.”

The strength of the UK market is also demonstrated by the growth in business process outsourcing (BPO) by UK companies. The UK accounts for over a quarter (27 per cent) of the total value of business process contracts signed worldwide to date in 2006, up from 19 per cent in 2005 and 23 per cent in both 2004 and 2003. The next largest user of BPO in Europe is Germany , representing 3.8 per cent of the value of contracts signed globally this year.

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