TPI Index Shows Third-Quarter Drop in Big Outsourcing Contracts

Shorter Average Contract Durations Driving Smaller Overall Contract Values, but Growth in Annualized Awards to Global Service Provider Community

HOUSTON, October 12, 2006 — TPI, the world’s leading advisor to global corporations on all facets of their service delivery strategies for business support operations today announced third-quarter developments in the global outsourcing industry through the TPI Index report. The third quarter of 2006 saw a decline in contracts by volume and value from the same quarter last year. The cause of the falling aggregate contact values can be tied to the decline in contract durations, especially for Information Technology Outsourcing (ITO) contracts. Since 2001, the average duration of a Broader Market contract has decreased 12 percent. In ITO, it decreased 18 percent, while for Business Process Outsourcing (BPO) it dropped 5 percent.

“There have been an increasing number of smaller, single-process contracts compared with larger, multi-process contracts in recent years. This trend holds true for both BPO and ITO contracts,” said Peter Allen, partner and managing director for Market Development at TPI. “Shorter term contracts have become more popular with only 12 percent of contracts signed in the broader market having a 10 or more year term.”

An unprecedented percentage of contract restructurings, with even shorter average contract durations, was the other principle contributor to the smaller total contract values.

Fewer multi-process contracts have been signed so far in 2006 than in each of the past three years. To date, there have been seven, compared with 20 in all of 2004, and 11 in 2005. By total contract value (TCV), multi-process contracts account for only 10 percent year-to-date, compared with 24 percent in 2004 and about 12 percent in 2005.

BPO is expected to grow by roughly 10 percent year-on-year due to the large number of contracts valued at less than $25 million. Although the TCV was lower, BPO had a great deal of activity in the third quarter with 58 signed contracts — an increase of more than 23 percent quarter-on-quarter and more than 26 percent year-on-year. The value of the third-quarter contracts exceeded $4.5 billion, which is up about 9 percent quarter-on-quarter, but down 15 percent year-on-year due to the number of single-process deals.

“The BPO market did experience growth globally in the third-quarter. We saw Europe closing the gap with the Americas, with nearly a 46 percent share of the BPO TCV signed so far this year, compared with almost 49 percent for the Americas,” said Allen. “Meanwhile, Big Six providers have seen their share of the BPO market drop from 40 percent to 35 percent.”

On the global service provider landscape, Indian-based providers continued to gain TCV market share, increasing from nearly 1 percent in 2004, to slightly over 4 percent of the Broader Market bookings so far in 2006. Their share of awarded contracts have also increased from about 2 percent to nearly 8 percent during the same period. India-based providers are beginning to sign business in infrastructure-related areas, and they have over 25 percent TCV share in the pure applications development and maintenance (ADM) market, more than any single multinational service provider.

TPI’s report introduced a view of annualized contract values awarded, which negates the impact of the shorter contract durations by presenting a view of the average contract value available in a typical year during the contract term. By this measure, 2006 is on a pace to produce absolute growth in outsourced contracting. “The traditional perspective of total contract value doesn’t fully convey the underlying trends in terms of the annual flow of contracting. This new metric will provide the market with a much more insightful measure of the trends,” said Allen.

With shorter contract durations, it is unlikely that fourth quarter total contract value (TCV) results will push total annual contract value beyond its 2005 mark of nearly $82 billon. Yet, the annualized metric shows a pace to achieve unprecedented heights in terms of annual flow of contracts.

To view past and current TPI Index presentations, and to order the Q3 2006 TPI Index Insider, please visit http://www.tpi.net/knowledgecenter/tpiindex/.

About TPI
TPI is the sourcing advisory industry founder, and the largest advisory firm in the world focused on a broad range of business support functions and related research methodologies. Applying 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, offshoring, shared services and outsourcing.