The Americas’ Low Point?

It’s been a wild year for outsourcing. The pace of commercial contracts is stronger than ever in Europe and Asia.  Indeed, for the first time ever, Europe saw more outsourcing contracts awarded than the rest of the world combined.
The offsetting news is a dramatic decline in the rate of outsourcing contracts awarded in the Americas, as measured by total contract value, or TCV. Look at the trend line:

Our research spotted contracts that have shorter terms and are more narrowly focused, two factors that explain the regional differences. The average outsourcing contract award in the Americas during the quarter carried a value of just under $155M, 38% less than the average value for the same period in 2006. In contrast, contract values are climbing in Europe and Asia, as are the average duration of engagements.

What’s going on?

Discussions with the buyers of outsourcing confirm that they are tending to contract for effort – headcount and hourly wages – rather than outcomes in some infrastructure services, especially application development and business processes. This trend is apparent more in the Americas than in other regions. Clients are more often opting to award contracts for access to labor at favorable pricing, rather than go through the effort to contract for defined services. The data bear this out.

At the same time that total contract values awarded in the Americas dropped by almost 54% from where the industry stood one year ago, the major India-based providers have seen their Americas-based revenues grow by 37% on a year-over-year basis.

That stat speaks volumes: The India providers are doing well in the Americas at a time when the region is not performing as strongly as the rest of the world. The reason why is that major India-based providers are using a “penetrate and radiate” strategy very effectively: Start small with individual clients and grow the business reach over time.

From a client perspective, the ease of contracting and the appeal of low cost labor are just too strong to ignore. I should also point out that while we typically talk about this model from the perspective of India-based service providers, multinational firms have made significant investments that allow them to compete head to head in the offshore marketplace.

This film is far from over, however: We see a stronger fourth quarter and a decent pipeline of new outsourcing demand going into the New Year. Europe likely will remain the strongest market, but the demand in the Americas looks to be improving.

 

Comments

[Subir Dhar]

Hi,

Interesting inputs.

It is really surprising to know that the US clients are increasingly moving towards Contract for Effort approach (hourly wages and headcount).

I believed that the trend is towards Fixed Bid contracts. As we all know, even in the fixed bid contracts the clients do get the benefits of access to talent, and that is built in by rate cards for extra efforts etc.

So, why is it so that the clients are moving away from Fixed bids to T&M approach? Is it so that the clients feel that the service providers are not putting in the adequate efforts or possibly able to do the work with very high productivity improvements and the benefits not being adequately passed on to clients?

One reason might be that the client IT organizations are comfortable in operating in a Staff Augmentation approach (it offers a lot of flexibility to client IT teams) as compared to Fixed Bid contracts.

Look forward to hear your thoughts.

Regards

Subir Dhar
Bangalore

[Peter Allen]

Subir;

I think you’ve hit the nail on the head. What we continue to hear is that IT professionals (among others) are really more comfortable buying effort. In fact, many of these Clients tell us that it’s easier to get a new resource added to their teams through a contract with an offshore provider than it is to go through the rigors of an internal hiring process.

Think about it. Most IT leaders were raised to lead teams of people, not to manage defined services. As such, it is much more natural to think in terms of people than services. Now … we *are* seeing an emphasis on project-based metrics. As you may appreciate, this is a good step towards outcome-oriented performance, but still generally falls short of a true service orientation.

Peter