FSN: Strong growth in European outsourcing fails to offset weakening U.S. demand

Strong growth in European outsourcing fails to offset weakening U.S. demand

29th October 2007
Europe 's outsourcing market has grown by 24 per cent since this time last year in terms of the total value of all contracts let, according to the latest Quarterly Index from sourcing advisory firm TPI. Europe is now the largest regional market, commanding its greatest ever share (almost 56 per cent, worth more than €21 billion) of the total value of major contracts let worldwide. This compares with its share of 37 per cent (worth €17 billion) at the same time last year.

Yet despite this growth in Europe , outsourcing activity globally has not exceeded last year's levels. Indeed, in terms of total contract value (which includes new deals and re-tenderings of existing contracts), the global outsourcing market has experienced a slowdown in growth since this time last year. The total value of outsourcing contracts awarded this year is down 17 per cent on this time in 2006 and represents the smallest award in the first three quarters since 2001. The aggregate value of contracts let in January to September 2007 has been just €38.2 billion, compared with €46 billion over the same period last year.

TPI attributes this shift to a soft market in the Americas . The total value of all major contracts awarded this year in the Americas stands at €11 billion, representing a 53 per cent decrease on this time last year. Over the same period, the US has seen a decline of 43 per cent in the value of entirely new contracts let, down from over €15 billion this time last year to just under €9 billion in the year to date.

This downturn is the result of two converging market trends in the Americas : firstly, a move among buyers towards smaller, shorter, more focused deals, and secondly, a significant decline in the level of re-tendering activity in the market. The average deal size of major outsourcing contracts in the States stands at €123 million, representing a 38 per cent decrease on the €198 million of this time last year. (As a point of comparison, the average deal size in Europe stands currently at €198 million, a 35 per cent increase on last year's level.) At the same time, re-tenderings account for just 18 per cent of the total value of major contracts let globally this year. The 82 per cent of total contract value represented by new deals constitutes an increase of over 21 per cent on this time last year.

Duncan Aitchison, Managing Director of TPI, commented, “The US market has shifted towards narrower and shorter outsourcing contracts. A major driver is the increasing popularity of the multi-sourcing model. We also perceive a tendency in US companies to tap into “framework agreements” or other forms of contracting for access to technical resources – often through India-based providers - rather than conduct an outsourcing transaction .

“At the same time, the flurry of re-tendering activity that was widely anticipated on the basis of the large numbers of contracts reaching the end of their term this year, has yet to materialise. Many contracts that are due for renewal have not actually hit the market. Some have been informally extended and others delayed. Our discussions with service providers reveal a growing trend for buyers to extend incumbent relationships on a short-term basis, without public disclosure, while they consider their options.”

The low level of contract restructurings means that the downturn in total contract value in fact belies the health of the market. Delays in re-tendering mean an unusually high proportion of those contracts that have been let are entirely new deals, representing true market growth.

Across the globe, the percentage of contracts with an element of offshore delivery also continues to rise. Looking at deals on which TPI has advised, 59 per cent currently involve an element of offshoring, up from an average of 43 per cent over the previous four years. So far this year, India-based service providers have won more than 24 per cent in number of all the deals on which TPI has advised, up from their average of 13 per cent over the previous four years (albeit for only 4.5 per cent of the total contract value). In the wider market, Asia Pacific represents 16 per cent of all major contracts let this year, up from an average of nearly 9 per cent over the previous two years. The region has also seen an increase of 72 per cent in its share of the value of new contracts, compared with the first nine months of 2006.

Duncan Aitchison commented, “The fact that more and more contracts are coming to include an offshoring element shows that as the outsourcing market matures it is becoming ever more diversified, with an ever increasing choice for buyers in terms of geographies, providers and offerings.”

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