FSN: TPI Index says European outsourcing romping away as global market slows

TPI Index says European outsourcing romping away as global market slows

27th July 2007
Demand for outsourcing in Europe has increased dramatically in the first half of 2007, compared with the same period last year, according to the latest Quarterly Index from sourcing advisers TPI. However n ew outsourcing business globally increased just 6%, as growth rate slows.

In Europe the total value of new (as opposed to renewed or restructured) outsourcing contracts in the €40 million plus bracket - where most significant outsourcing activity occurs - is up 78% on 2006 .

This € 12.3 billion of new business represents a significant recovery from the relatively soft outsourcing market experienced in Europe last year, and is a 23% increase on an average € 10 billion of new contracts added in each of the previous five years. So impressive is Europe's record on new deals this year that it accounts for over half (54%) of new outsourcing contracts signed globally, against 32% last year and a five-year average of 38%.

Duncan Aitchison, Managing Director of TPI, explained: “Continental European countries have been relatively slow to adopt outsourcing, which makes it a market with huge growth potential. Five years ago, the region accounted for only twelve per cent of global outsourcing deal activity, and only Germany , France and the Netherlands managed to achieve above a one per cent share. Now, Continental Europe has nearly trebled its share to thirty per cent, with Belgium , Denmark , Norway , Finland , Switzerland and Italy each representing over one per cent of the global market.”

Europe 's buoyancy has been driven in particular by a concentration of “mega deals” in the region. These deals, each worth in excess of € 800,000 million, represent 44% of the new business to hit the European outsourcing market so far in 2007.

Four of the five mega deals awarded in Europe this year have been for network outsourcing, as indeed have been five of the eight mega deals struck worldwide, with growth in this area propelling telecoms companies up the hierarchy of global outsourcing providers. Ranked by their share of contract awards worth over € 40 million (including restructurings), BT now takes the number two position worldwide, up from number 13 last year; Alcatel-Lucent and Ericsson take the number five and six spots, up from 15 and 11 respectively; and AT&T enters the top 15 for the first time at number 10.

The Global Big Six ( Accenture, ACS, CSC, EDS, HP and IBM), who continue to dominate the global outsourcing market in terms of existing contracts, have won only 10% of mega deals by value so far this year, compared with an average of 63% over the last four years. The Big Five Europe ( Atos Origin, BT, Capgemini, Siemens and T-Systems), who dominate ongoing outsourcing service provision in Europe, have won 27% of mega deals, compared with only 16% over the last five years, reflecting Europe's increasing importance at the top end of the global outsourcing market.

In the broader market of deals over €40 million, the Big Six maintain more of a dominance, at 41%, albeit they have witnessed a 22% decline in their share this year, compared with the last four years. The Big Five have a 13% share of this same market, down 12% on their four-year average.

However, the picture for the outsourcing market globally is much more subdued than in Europe . New business worth €22.6 billion has been added to the market so far this year, in terms of contracts worth over €40 million. Whilst this is 6% more than for the same period in 2006, it is 13% less than the average for the last five years.

Duncan Aitchison explained: “We believe the slowing of growth in the global outsourcing market is driven by the fact that offshoring to a wholly-owned captive operation, or tactical out-tasking of small, discrete processes, is currently considered an alternative to outsourcing by some client organisations looking for short-term cost savings. Other clients are going beyond a focus on cost savings to seek innovative outsourcing relationships and competitive advantage. The challenge for service providers is to add value in the labour arbitrage game and/or to offer the kind of transformation that will deliver far wider-reaching benefits.”

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