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By Mark Mayo, Partner & President, Global Resources Management, TPI
This quarter showed record performance, but not enough to lift the YTD results to 2008 levels. Very importantly, several large and unique contracts in telecommunications were responsible for a significant portion of the quarter’s performance. Highlights for the quarter include:
A few very large Telco-to-Telco contracts — instances where one telecommunications carrier outsources its network operations requirements to another telecommunications service provider —accounted for more than 30 percent of the Broader Market’s total contract value (TCV).
Resurgence in mega deals, or contracts valued at US$1 billion or more, occurred both with and without Telco-to-Telco deals.
Significant IT outsourcing TCV growth, driven primarily by Telco-to-Telco deals, took place, with Broader Market BPO (contracts >$25M in TCV) continuing to lag. BPO outsourcing adoptions continues at the smaller contract level (<$25M in TCV).
The number and TCV of contracts signed in Asia Pacific increased substantially, with and without the impact of Telco-to-Telco.. Year-to-date, the region’s TCV has already exceeded the value of its contract awards for all of 2008.
Based on the tradition of strong fourth quarters, and a more robust industry pipeline, we expect positive movement in the marketplace during the next 6 to 9 months.
Check out the full Q3 TPI Index presentation below:
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
Today's blog comes from Peter Allen, Partner and Managing Director, TPI.
As we close the books on 2008, it’s clear that the outsourcing industry is experiencing a perfect storm of obstacles for the supertanker-sized deals, but the zodiacs are continuing to ride the waves.
Our TPI Index showed strength among the number of contracts, the total contract value, and the annualized contract value for 2008, all exceeding previous years’ values. Strong growth during the first half of the year more than offset the slowdown experienced by the industry during late 2008 as a result of the economic environment. Though we’re entering the New Year on the heels of a strong 2008, there is hesitation among corporate decision makers who must make long-term commitments for the higher-valued contacts amidst the current economic environment, indicating a headwinds for the industry in the coming months.
But, if we look at the underlying metrics, there’s a steady tempo of contracts at the lower end of the TCV spectrum. Outsourcing is still being utilized by many companies to deal with the headwinds of uncertain and declining economic conditions. We think that this ‘tactical’ application of outsourcing services is indicative of the concern over near-term economic health, essentially a move to reduce costs and preserve capital. Conversely, when we see a resumption of some of the higher-valued contract awards it may be the first indication of a broader economic recovery.
I still think that 2009 will be a defining year for outsourcing. We may see some consolidation among service providers and some repositioning of industry-specific and standardized offerings. Ultimately, the Satyam-related anxiety facing the industry will pass Satyam: It was like riding a tiger, not knowing how to get off without being eaten - Horses for Sources, but the focus on operational resilience will move upwards in the corporate agenda.
Divestiture of captives, which we have seen in the financial services sector, is not over, but there is a limit to the service provider community’s appetite. Taking on more capacity in times of uncertain demand is risky.
All in all, the stable and nimble ships will ride out the storm and move further up the value chain as a result.
Today's blog comes from Peter Allen,
Partner and Managing Director, TPI
With this week’s release
of the Global TPI Index for third quarter 2008, I’ve been presented with a
number of hard-hitting questions by the media, service providers and the global
equity research community. Instead of addressing these one-on-one, I wanted to
share my answers with all readers. If you have added questions, feel free to
post them here.
It’s clear from the
questions that the current economic meltdown is driving concern for the future
of the outsourcing industry. The objective of my answers is to bridge the gaps
between market expectations that precipitate from the current economic crisis,
as well as future trends in the outsourcing industry. Several forces are at
play, ranging from budget cutting, debt limitations, pressure on profit
margins, dramatic restructuring of corporations comprising the financial
services industry, and government involvement. There’s a lot of speculation and
even more questions, which is understandable given the current volatility and
uncertainty in the global economy.
Let me know if you
agree or see things differently. I’m interested in hearing your point of view.
Q: Are
you seeing budgets getting cut in 2008 compared to previous years?
A:
Budgets for “back office” functions in virtually all companies in all
industries are being scrutinized and, in many cases, reduced. We hear of some
rather extreme challenges being laid on CIOs, CHROs, and business executives. There’s a focus on entering the new calendar
year with an adjusted run rate for operational expenses – run rates that better
align with the demand profile for goods and services for those companies. This
is prudent management in the face of uncertain economic circumstances. In
recessionary markets, when consumption decreases, it is natural to reduce
capacity for servicing that demand. The percentage of impact varies by industry
and function. If a company isn’t hiring new employees to service growth, then
the HR department isn’t going to get investment in new capacity. It’s as simple
as that. What this means to the outsourcing industry is two things.Firstly, existing contracts will be called
upon to dial-back aspects of service to reduce the total costs to the Client.As I said on the TPI Index call, a
well-designed outsourcing contract has many levers available to achieve
variability in costs.The second effect
is a delay in starting new projects, even those that have positive implied
returns.
Q: As
times get tougher going into 2009, shouldn't we see the growth rate towards
outsourcing accelerate?
A:
Yes, and growth will come in two forms. Existing outsourcing arrangements may
see scope expansion as clients conclude that the favorable economics of those
relationships allow for near-term benefits by doing more work via cost-effective
service providers. This is not the inverse of my prior point about Clients making
selective use of available cost-control levers.Rather, this growth will come through added scope to those providers who
have weathered the recessionary storm with their Clients.Secondly, we’ll likely see an upturn through
divested operations and associated services agreements. I think this will be a
significant characteristic of the early-2009 marketplace. Those are the
near-term upsides via outsourcing. Broader, transformational-oriented
outsourcing may take a while to return to flight.
Today's blog comes from Peter Allen,
Partner and Managing Director, TPI
In today’s 3Q08 TPI
Index
we reported that the third quarter delivered significant softness in commercial
outsourcing contract awards – not entirely unusual for third quarter results,
especially when those third quarters follow quarters of unusual strength, as
did 3Q08. Yet, in the face of the unrest in the global financial markets, this
report is significant for what it might foretell for the coming quarters. (To
download the complete TPI Index findings, visit: http://www.tpi.net/knowledgecenter/tpiindex/)
The softness in
outsourcing contract awards comes at a time when the instability of the world’s
financial markets is top-of-mind for most of us. And, looking at the record for
the Financial Services industry, which has been the preeminent buyer of
outsourced services for as long as records have been kept, we see that
uncertainty has continued to impact the deal flow.
Softness in the
global Financial Services industry’s use of outsourcing, which started late
last year, was a definite contributor to the third quarter’s soft market
activity. And we have yet to see the full impact. That’s because the TPI Index
metrics for Q3 and 2008 YTD, represent the results of outsourcing initiatives
begun in more “stable” times. The uncertainty and unrest of today’s global
economic climate has yet to show up in our measurements of the outsourcing segment
focused on the Financial Services industry. Those tallies are ahead of us.
So, in such a
climate, what’s in store for the big picture of outsourcing?
Today's blog on TPI's 2008 second quarter Index comes from Peter Allen, Partner and Managing Director, TPI.
Having just
posted the scorecard for the global outsourcing industry’s contract awards for
the first half of 2008, I must say that there are more than a few conflicting
messages being bantered about.
We’ve been
producing the TPI Index for almost six years now, and our track record of
reporting on the market size and trajectory has a consistently small margin of
error. No one is perfect in this art,
but our business intelligence analysts are usually right on target. We invest
considerably in tracking the market to help guide our clients with facts about
peers and providers in particular domains.
The report
for the first half of 2008 was striking.
Today's blog on the state of the outsourcing industry comes from Peter Allen, Partner and Managing Director, TPI.
With the risk of sounding too dramatic, I think that 2008 is
going to be a defining year for the outsourcing industry.
Whether the U.S. economy has entered a recession or not is still up for debate. What’s certain
is that companies in consumer-oriented industries are behaving as if protection
of profits and cash flow are much more important than driving growth.
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.
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.
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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 
