News @ TPI

Financial Services Industry Ponders Outsourcing As Economic Downturn Bites

Tougher economic climate means more companies are looking to outsourcing to deliver cost savings; points to defining year for the outsourcing industry
Europe dominates outsourcing industry due to continued softness of American market
2008 off to a strong start with 122 contracts valued at over €16.5 billion awarded to date

17th April 2008 - TPI, the largest sourcing data and advisory firm in the world and a unit of Information Services Group Inc. (ISG) (NASDAQ:III), a leader in the information-based services industry announced that more companies are turning to outsourcing service providers to deliver variability in costs and lower overall expenditure in the current tougher economic climate, according to the latest Quarterly TPI Index. There is an expectation that the back-end return to growth will be made possible by outsourcing, as was the case after the 2001 recession.

Financial services has traditionally been the leading sector for outsourcing, however, to date in 2008 they failed to rank in the top three sectors by total contract value awarded. Usually, financial services accounts for well over 30 percent of the value of outsourcing contracts awarded in EMEA, yet so far this year, it represents just 14 percent. Instead, the lion’s share of contract value in EMEA was signed in the energy sector – based entirely on contracts signed by Shell.

Duncan Aitchison, partner and president, TPI EMEA comments: “After years of relative growth and prosperity for the financial services sector, in mid-year 2007, the sub-prime bubble burst. The banking sector, largely unsure of the extent and depth of the impact, froze decision-making as it tried to quantify the scale of the problem. The outsourcing debate along with many other corporate initiatives went on hold for a few months.”

TPI expects outsourcing interest from financial services companies to rebound during the remainder of 2008. Since it has become apparent that the credit crunch is serious and probably recessionary in its impact in the United States, banks, facing tougher times for the foreseeable future, have again started to focus on profitability and cash flow. Strategies that were growth-driven during more prosperous times are becoming profitability-driven in response to the more challenging economic climate.

“Outsourcing is back on the agenda,” adds Duncan Aitchison. “Logic dictates that we should therefore see this manifest itself as increased market activity as the year unfolds. The credit crunch has also led a number of banks to look at whether some peripheral assets might be realised. Several banks are now exploring whether their offshore captive operations can be monetised through sales to the service provider community. This would also increase outsourcing as every disposal would need to be accompanied by a service agreement.”

The economic challenges in the financial services sector and other consumer-oriented industries provide a litmus test for outsourcing relationships which will be called upon to achieve near-term cost reductions and provide for growth at the back end of the downturn.

EMEA is hot

EMEA represents about 70 percent of the total global value of outsourcing to date in 2008 – up from about 50 percent for the full year of 2007. The Americas accounted for about 23 percent, down from a full year share of about 35 percent in 2007. While the United Kingdom is the most mature market in EMEA, there are also high levels of outsourcing activity in Northern Europe and some large signings in the Middle East and Africa.

“The demand for outsourcing in EMEA reflects the relative immaturity and under-penetration of outsourcing in this region when compared with the United States,” comments Duncan Aitchison. “There remain significant emerging, and largely untapped, market opportunities within the EMEA region, which should sustain healthy demand levels for the foreseeable future.”

TPI’s data indicates that the Americas region is demonstrating structural changes in some of the most vital measures of outsourcing strategies. The average contract value has dropped about 50 percent, from about €165 million in 2003 to about €81 million to date in 2008. Contract values are not only becoming smaller, they are also comparatively shorter with the average contract duration so far in 2008 falling below five years for the first time ever. Additionally, the regions profile is shifting from ITO to BPO.

“The net effect of the shifts in the United States and Americas portfolio is a market in which offshoring is increasing in significance and services are contracted in more discrete units with shorter cycle times,” adds Duncan Aitchison. “Clients and service providers alike are positioning to convert effort-based contracts to those that pay for outcomes. Simply stated, low unit-costs do not guarantee favourable total costs and there is some movement towards realignment of incentives through outsourcing strategies.”

Strong start to 2008

Overall, the first quarter and the last six months got the year off to a healthy start that TPI expects to continue. 122 contracts totaling over €16.5 billion have been signed to date in the broader market (commercial contracts valued at over €20 million). Looking at annualised contract values, which removes the distortions of contract length, €3.5 billion was signed this quarter, up nearly 19 percent on this time last year – the second best first quarter ever.

Duncan Aitchison says: “We have seen a positive start to the year and an indication of the ongoing vitality in the adoption of outsourcing. TPI anticipates a healthy growth of about 9 percent in the overall market for 2008.”

About TPI

TPI, a unit of Information Services Group, Inc. (ISG) (NASDAQ:III) is the founder and innovator of 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 and extensive practical experience, TPI’s accomplished industry experts collaborate with organizations to help them advance their business operations through the best combination of business process improvement, shared services, outsourcing and offshoring. For additional information, visit www.tpi.net.

About Information Services Group, Inc

Information Services Group, Inc. (ISG) (NASDAQ:III) was founded in 2006 to build an industry-leading, high-growth, information-based services company by acquiring and growing businesses in advisory, data, business and media information services. In November 2007, the company acquired TPI, the largest independent sourcing advisory firm in the world. Based in Stamford, Conn., ISG has a proven leadership team with global experience in information-based services and a track record of creating significant value for shareowners, clients and employees. For more, visit http://www.informationsg.com.