News @ TPI
Fewer Contract Restructurings Contributes to First-Half Slowdown in Sourcing Deals, TPI Index Shows
Bright Spots: “New Scope” Deals and Financial Services Sector
HOUSTON, July 11, 2007 - TPI today unveiled its analysis of the global outsourcing industry for the second quarter, as well as the first half of the year overall as captured by the TPI Index report, the source for comprehensive marketplace intelligence on sourcing. The Index, which measures trends in transactions by industry, geography and service provider, among other categories, shows that the pace of contract restructurings slowed considerably in the first half of this year. That development, in turn, pulled down the overall market value of sourcing transactions, especially in the Americas, and supports TPI’s forecast for a soft 2007 for the overall industry.
Restructured contracts — renewals, renegotiations, and related changes to prior contracts — accounted for 26 percent of all sourcing agreements last year. But so far in 2007, contract restructurings represent only 17 percent of the broader market, which includes commercial contract awards with total contract value (TCV) of $50 million or greater, a development TPI attributes to incumbent service providers aggressively renewing their agreements to avoid competition.
Sourcing activity has also decreased in the broad market, with the first half of 2007 registering a 25 percent decline in the number of contracts awarded compared to last year’s first half. Further, the TCV of contracts awarded ($33 billion) represents the smallest first-half award values since 2001 and is 34 percent below the TCV awarded in the first half of 2006. The annualized contract value (ACV), or average annual spend, is off as well: At $5.5 billion, it is 30 percent below the ACV awarded in the first six months of last year. This softness is especially apparent in the Americas, in business process outsourcing (BPO) and, increasingly, in IT outsourcing, too.
The industry did see a bright spot, however: new contracts in which no prior relationship existed. The average contract value for these deals rose 20 percent, while the number of new-scope contracts stayed level from the prior year. Overall, the first half of 2007 saw $28 billion in new scope transactions, which are important bellwethers of where the outsourcing industry is headed.
“After four consecutive years of year-over-year decline in average TCV for new scope agreements, this is the first up-tick in average award values,” said Peter Allen, partner and managing director of Market Development at TPI. “In addition to new scope TCV, new scope ACV has also increased, which is another indication of market growth, rather than decline.”
Manufacturing, telecommunications, energy and financial services all show growth, especially financial services, which led the way among all industry sectors with 47 contract awards worth $11.5 billion — accounting for over one-third of all broader market contracts and TCV in the first half of 2007. Financial-services companies are expected to make even greater use of sourcing solutions in the months ahead.
The decline in outsourcing is also reflected in the current state of BPO. Although the number of contracts was up dramatically in the second quarter from an unusually slow first quarter, the 78 BPO contracts that have been awarded so far in 2007 represent a year-over-year decline as the industry struggles with a maturing market sector.
The Americas saw 56 contracts signed in the first half of 2007, down from 86 in the first half of last year. The TCV for these contracts totaled $10 billion, off from $24 billion in the first half of last year and the lowest first-half TCV value since 1994. In comparison, Europe ended the half year with more than $18 billion in broader market TCV, up considerably from the $14 billion registered in the prior year’s first half. This is one of the few times Europe’s TCV share has exceeded that of the Americas.
The TPI Index data indicates a polarization of the sourcing industry is occurring as clients are increasingly weighing the merits between offshoring for near-term cost savings through labor arbitrage and outsourcing for longer-term transformational solution. The data shows a decline in the number of active outsourcing agreements and an increase in offshoring relationships, which are looked upon as quicker, less complex “fixes.”
Peter Allen adds, “Offshoring appears to be competing with outsourcing, with clients electing more frequently to adopt offshoring strategies rather than outsourcing. This is placing pressure on outsourcing providers to take it to the next level and look beyond just providing cost-savings, a front on which they struggle to compete, to give clients more of what they are increasingly looking for — value-added solutions and innovations such as specialized skills and process expertise.”
Despite a subdued first half, TPI projects modest growth for the industry overall, about 5 percent in annualized revenue for 2007 compared with 2006, driven largely by the lack of significant large-scale contract terminations in recent quarters and new scope added. Further, TPI expects that 2007 will produce lagging full-year results in both TCV and ACV.
To find out more about the polarization of the sourcing industry, please visit Peter Allen’s blog (www.considerthesourceblog.com) and join in the discussion that will address questions such as – Offshoring vs. outsourcing: Are these really the choices being weighed? Can the outsourcing industry deliver on value-creation promises beyond, but including, cost savings? Or, has the industry set its course towards focusing on “cheaper how” not “better what”?
To view past and current TPI Index presentations, please visit http://www.tpi.net/knowledgecenter/tpiindex/.
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. Utilizing deep functional domain expertise of accomplished industry experts who possess extensive practical experience, TPI collaboratively works with organizations to help them optimize their business operations through the best combination of insourcing, shared services and outsourcing. For additional information, visit www.tpi.net.