News @ TPI
US Outsourcing Market Down While Europe Sees Buoyant Growth
- Two-thirds increase in total value of contracts let in Europe
- Global outsourcing market down by almost a third
Thursday 19th April 2007 - The latest Quarterly Index from sourcing advisers TPI 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.
Duncan Aitchison, Managing Director of TPI, 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.”
The TPI Index also reveals 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 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.”
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.
Other major findings of the latest TPI Quarterly Index include:
Decline in Business Process Outsourcing
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.”
Reduction in prevalence of contract restructurings – but not in Europe
The Index also revealed a shift in the prevalence of contract restructurings. Restructurings were a major part of the market during the past two years. However, the pace has slowed in the first quarter of 2007. This quarter, 12 out of the 68 contract awards were restructuring-related valued at almost $3 billion (€2.4 billion), compared with 19 contracts restructured worth $7.5 billion (€6 billion) in the first quarter of 2006. Overall, the number and total contract value of restructurings have declined during the past three quarters. By contrast, Europe saw an increase in the total contract value of restructurings in the first quarter to $2.2 billion (€1.7 billion), an increase of 112% quarter-on-quarter and 21% when compared to the first quarter of 2006. These first-quarter restructurings accounted for about 22% of the total contract value of the broader market, consistent with the past two years.
Duncan Aitchison said:
“The slowdown in restructuring activity can be partly explained by the fact that service providers are more willing to informally vary scope before the contract reaches its conclusion, thus avoiding a full-scale restructuring. This is great news for both buyers and vendors. Improved communication during the life of the contract means that buyers are able to effect change without having to wait for it to reach its term, and vendors can increasingly avoid the risk of losing a contract to a competitor through restructuring.”
About TPI
TPI is the founder and innovator for the sourcing advisory industry, and the largest sourcing advisory firm in the world. We are expert at a broad range of business support functions and related research methodologies. Utilising deep functional domain expertise of accomplished industry experts who possess extensive practical experience, TPI collaboratively works with organisations to help them optimise their business operations through the best combination of insourcing, offshoring, shared services and outsourcing. For additional information, visit www.tpi.net.