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Tighter Times for Outsourcing Providers
- 8% decline in new outsourcing contracts
- Worst fourth quarter in five years for outsourcing deals
- Average contract length almost halves in ten years
- Competition heightens as new players win increasing market share
January 11, 2007 - Outsourcing providers face increasing challenges in 2007, according to the latest Quarterly Index from outsourcing advisers TPI. The final quarter of 2006 was the worst fourth quarter in five years in terms of the value of outsourcing contracts awarded. In addition, the value of contracts entirely new to the market (this excludes retenderings of existing contracts) declined by 8% on 2005 levels.
The trend towards shorter and smaller contracts, and more specialist and single process deals, means that tendering activity nevertheless remains frenzied, with a record number of 350 contracts being agreed in 2006 – smashing last year’s 341, the previous record.
Duncan Aitchison, Managing Director of TPI EMEA and Asia-Pacific, commented: “In practice, the trend towards shorter contract duration means that outsourcing providers are obliged to compete more often in order to secure the same level of business. For many the cost of sale can become a major issue. Consequently service providers need to be increasingly selective in terms of the contracts they pursue.”
At the same time, competition has been heightened with more providers competing for market share – the number of providers winning contracts has increased by 64% in the last four years, from 55 in 2002 to 90 in 2006.
The Big Six of outsourcing (Accenture, ACS, CSC, EDS, HP, IBM) are winning a decreasing proportion of those deals valued at over $50 million (€40 million). Their share of market globally by total contract value has fallen from 71% in 2002 to 46% in 2006.
Duncan Aitchison, continued:
“In general terms, this increased competition is clearly good for buyers. However, greater diversity and specialisation amongst suppliers, combined with more frequent tendering, does mean more complexity in both the procurement process and the management of outsourcing contracts.”
Those service providers head-quartered in India, such as Wipro, Tata, and Infosys are reaping the benefits of the trend towards single-process and specialist deals. These providers, alongside the Big Five in Europe as well as other smaller and niche providers, are encroaching upon the Big Six’s market share. In 2006, the India-based providers achieved 7% of the total market share. This is a massive increase compared with their 2002 market share of less than half a percentage point.
The India-based service providers are particularly successful in the Applications Development and Maintenance (ADM) sector, having grown their market share from 8% in 2003 to 36% in 2006. In contrast, the Big Six have seen a decline from 76% of the ADM market in 2003 to just 38% in 2006.
Duncan Aitchison, concluded:
“The figures clearly show a maturing of the India-based service providers, as they challenge the established players by taking an incremental approach and signing a large number of small, specialist contracts. In the ADM space, for example, although they have not yet surpassed the Big Six, the difference between the market shares of these groups is now marginal. India-based providers are clearly considered an attractive and credible alternative to traditional players and over the next few years we expect to see them competing directly with the Big Six for larger value contracts.”
Replay information:
The call will be available to replay for 7 days from 11 January 2007 until midnight on 18 January 2007. For a copy of the Index report please contact Emma Phelan on 020 7760 8677 / 020 7608 3222.
- UK London: 020 7031 4064
- Access Code: 733087
About TPI
TPI offers sourcing advisory solutions that support organizational goals to create enduring value, achieve effective transformation, and meet rapidly changing market demands. Since 2000, TPI has advised on more than 25 percent of total contract value awarded in the broader outsourcing market, which includes commercial contract awards each valued at €40 million or more. With 340 advisors to help clients find the right balance of value, speed-to-market and risk mitigation, TPI remains the most sought-after advisory firm in the world. TPI operates in locations including Houston, New York, Toronto, London, Paris, Brussels, Frankfurt, Sydney, Bangalore and Singapore. For additional information, visit www.tpi.net.