Today's blog comes from Peter Allen, Partner and Managing Director, TPI
When our January TPI Index summarized 2008, I wrote that “the stable and nimble ships will ride out the storm and move further up the value chain as a result.” Well, with Q1 in the books, we can report that the storm looks a lot like what we saw around the recession of 2001, and prior to the EMEA-driven surge of 15 months ago. See our TPI Index report at: http://www.tpi.net/pdf/index/1Q09_TPI_Index_Presentation.pdf
With 141 contracts awarded in Q1, valued at about $19B in Total Contract Value (TCV), and nearly $4B in Annualized Contract Value (ACV) the quarter was down 21% Q/Q and 22% Y/Y. The ACV awarded in the quarter decreased 18% Q/Q and 27% Y/Y. In fact, among first quarters the TCV was the lowest since 1Q01 and the ACV awarded was the lowest since 1Q03. This weaker award profile has been apparent since 3Q08.
That’s not a surprise to the followers of the booking reports of the major service providers. There were 48 different service providers winning at least one contract award in Q1.
So where will the market go from here? Looking forward, we expect this quarter’s pace to continue into next quarter. Although outsourcing service providers tell us that their pipelines are robust, recent experience suggests that it is taking longer to convert the pipeline into contract awards. There’s conservatism evident in the decision-making and the scale of the outsourcing deals being brought to market.
I still think that 2009 will be a defining year for outsourcing. We’ve weathered the Satyam disruption, and the underlying flow of smaller outsourcing contracts appears to be healthy. What’s missing is the volume of big, transformational deals that excites the industry. Discounting the impact of mega relationships, we observe a noteworthy sequential increase in ACV for the most recent three-quarter periods. Without mega relationships, the past three quarters represent an all-time high in ACV for any three-quarter period, at $8.5B.
When we looked closely at industry activity, we found that some sectors were adopting outsourcing at a more robust pace than they have in the past, especially during the recent economic downturn. We found four industries that met the criteria on a global basis: Media, Retail, Utilities and Telecom. Together, the four represent about one-third of recently awarded contracts. Each sector accelerated the number of outsourcing contracts it awarded by at least 20% over historical levels during the past 12 months. We discovered that each of the four industry segments presented a unique set of circumstances. More details are available here: http://www.tpi.net/resources/service_providers/TPIMomentum.html
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