Three Little Words for 2007

Many times “Less is more” has proved to be an empty catchphrase. But I’m happy to say those three words accurately describe outsourcing trends in 2007: Despite downturns in many readings of the market, there’s ample evidence of opportunity for both sourcing providers and their partner clients. Momentum is strong.

TPI’s Index for the final quarter of last year shows that while total contract value (TCV) for all of 2007 registered the lowest level in five years, annualized contract value, or ACV, came out strong. ACV matters, because it strips out the ambiguities introduced into any measure of the market by contract durations. ACV totaled $15.2 billion for the year, just a notch below the five-year average of $15.3 billion. And the fourth quarter’s ACV was the best three-month reading since the middle of 1996. Yup, best in the past eleven years! 

Indeed, the fourth quarter was strong overall, as we anticipated: Even though TCV for the year of $80.4 billion was a decline of some $4 billion over 2006, the fourth-quarter reading of $27 billion was the highest TCV we’ve seen in a quarter since the first quarter of 2006.

OK, so there’s no getting around the fact that overall volume of deals was down. The effect was also seen in a decline in the number of service providers that won a deal – 12% fewer than the number of providers that won in 2006. The question is why?

The simple answer: quality. Providers are shifting their focus from new scope transactions to stabilizing the business they already have. And, clients are moving beyond tactical cost-oriented arrangements to ones that have the legs to run for many years and through more hurdles. That means not only more selectivity, but also more of an effort to partner in meaningful relations that encourage and reward innovation over simple labor/cost arbitrage.

Proof that successful relationships are being extended came in 2007’s doubling of business-processing outsourcing (BPO) deals that contract for multiple functions. These kinds of deals barely registered in prior years.

Other noteworthy shifts seen in 2007: Europe, the Middle East and Africa (EMEA) accounted for more than half of global BPO TCV and both the number of contracts and TCV in EMEA exceeded those measures in America for the first time ever, India topped the list of countries outsourcing in the Asia Pacific region, and China signed a few large outsourcing contracts. Translation: it’s a truly global industry, with buying and service provision being country-neutral.

In the year ahead we’re telling clients and market contacts to expect selectivity, diversity, competitiveness, and regional momentum to continue as corporate leaders realize the value of addressing the global dimensions of their business strategies. We expect continued growth of the outsourcing industry in the year ahead, likely surpassing the 7.3% Y/Y growth in annualized revenue we counted in 2007.

Bottom line: The industry is showing positive signs of quality being exchanged for quantity. Less really is becoming more.

Comments

[Dinesh Goel]

Peter - You mentioned the increase in number of transactions in BPO spanning multi function scope. That's quite a change from the past where the data was showing greater number of single function transactions. How are you reading more into this trend? Is it reflective of the increasing maturity of BPO space or the trend of bundling at least in BPO asserting itself or a bit of both?

[Peter Allen]

Dinesh;

I can't point to any real step-up in maturity of Provider offerings driving this. At least, not yet. If I were to generalize, I'd say that companies with their own relatively mature 'captive' shared services operation are considering the outsourcing of those operations more readily. That *is* a bit of a change from the recent past. When they do so, they often look to include as broad a scope as might be practical, and seek Providers that are willing and able to add value over time to those operations.

Peter