News @ TPI

EUROPE SEES 78% INCREASE IN NEW OUTSOURCING DEALS

European buyers dominate top-end of outsourcing market
Network outsourcing mega deals shake up top global supplier hierarchy
New outsourcing business globally increases just 6%, as growth rate slows
Inclusion of offshore delivery in outsourcing deals hits record high
Financial services, outsourcing’s largest market, displays major growth potential
Restructuring deals take a nose dive worldwide
US outsourcing market at its softest since 1994
Asia Pacific sees 50% growth in new deals

Thursday 12th 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. 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. Moreover, of €7.8 billion in mega deals awarded globally this year, over two thirds (68%) have been in Europe, which compares with an average of 39% over the last five years and gives Europe its greatest ever share of this top end of the outsourcing market.

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.

Other major findings of the latest TPI Quarterly Index include:

New outsourcing business globally increases just 6%, as growth rate slows
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.”
Inclusion of offshore delivery in outsourcing deals hits record high
Despite TPI’s observation of an increase in offshoring through captives, the use of offshore service delivery within the scope of outsourcing also continues to expand. In the first six months of this year, 59% of the deals on which TPI advised entailed at least partial delivery offshore - the highest percentage ever.
Financial services, outsourcing’s largest market, displays major growth potential
Financial services, with 35% of the total contract value (including restructurings) awarded by commercial organisations worldwide this year, is overwhelming the largest private sector market for outsourcing, being more than three-quarters bigger than its closest rival telecoms (19.7%). 75% of financial services outsourcing worldwide has occurred in Europe in 2007, and an average of just over 50% over the last five years.

Despite its leading position, according to TPI research the sector still offers considerable scope for outsourcing expansion. Even now only a quarter of the 590 financial services providers among the Forbes Global 2000 companies* has entered into an outsourcing arrangement of any size, with the majority of outsourcing activity still concentrated among the top 25 players in the sector.
Restructuring deals take a nose dive worldwide
Deal activity in terms of outsourcing contract restructurings and renewals has been very flat so far this year, down 71% worldwide on the first six months of 2006 and 49% on the five-year average. The value of contracts restructured in Europe in the first half of 2007 (€2 billion) than half that over the same period last year. Duncan Aitchison, Managing Director of TPI, commented: “The lack of restructurings in the marketplace is an indicator that incumbent providers are becoming increasingly proactive in renewing their agreements in ways that are seamless and uneventful for either party.”
US outsourcing market at its softest since 1994
The US outsourcing market is particularly soft, with restructuring deal activity down 79% by value on 2006 and 67% on the average of the previous five years. New business deals are down nearly 50% on the first half of last year and 54% on the five-year average, with only €6.3 billion of contracts new to the market in 2007, compared with €12.4 billion in 2006. New and restructured contracts are together down 60% on last year, making this the flattest first six months of outsourcing deals activity in the US since 1994.
Asia Pacific sees 50% growth in new deals
In Asia Pacific, the €4 billion of new outsourcing business added to the market this year is roughly double that last year and 72% above the five-year average.

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, shared services and outsourcing. For additional information, visit www.tpi.net.