TPI Index Reveals a Tale of Two Halves and Two Continents
22 January 2009:
London, 22nd January 2009 - TPI, the largest sourcing data and advisory firm in the world and a unit of Information Services Group Inc. (ISG) (N1ASDAQ:III, IIIIU, IIIIW), a leader in the information-based services industry, reveals that 2008 was a strong year for the outsourcing industry, but closer examination shows that it was a tale of two halves and two continents.
The TPI Index for the fourth quarter of 2008 shows that the total value of outsourcing contracts signed in 2008 amounted to nearly €72 billion – exceeding the value for 2007. Annualised contract value (ACV) — the total contract value divided by the duration of the contract — was the largest ever with a record €14.1 billion. This fact reflects the impact of shorter overall contract duration, evidence of a tactical orientation to outsourcing as corporations focus on near-term concerns related to their day-to-day business. However, while the full-year figures are strong, the second half of 2008 witnessed a slowdown in outsourcing, particularly in EMEA. The second half of 2008 was one of the weakest half-years on record in terms of value of contracts awarded. Contracts totalling €31.3 billion were signed in the last six months of 2008 – a 20 percent drop in total contract value compared to the first half of the year. In fact, it resembled the first half of 2001, the year that saw the last global recession.
Duncan Aitchison, partner and president, TPI EMEA comments, “While the causes, severity and cures of the current and previous recessions differ, we do note similarities in the global outsourcing metrics between the first half of 2001 and the second half of 2008. While the outsourcing market is now larger and a lot more mature, we interpret both of these recession-related low points as representing a ‘pause’ in strategic decision-making about outsourcing.
“Looking ahead, the fundamental business case and return on investment from outsourcing remain solid. Just how long the current hesitation will last is something we will revisit in detail during the coming quarters.”
A tale of two Continents
The strong full-year global figures have been driven in large part by a strong performance in EMEA. The region recorded its highest number of contracts ever awarded and the total value of contracts signed in 2008 was up 17 percent year on year. For the first time ever, more contracts were awarded in EMEA than in the United States – 271 compared with 243. EMEA represented 55 percent of the total value of outsourcing contracts awarded globally compared to 32 percent for the United States. This compares with 38 percent and 51 percent in 2006 for EMEA and the United States respectively.
Duncan Aitchison explains: “The strong results for EMEA were achieved primarily on the back of a strong first half and in particular through the level of mega-deal activity in the region, which awarded two-thirds of the world’s $1+ billion contracts last year. That said, the value of contracts awarded in EMEA dropped by almost 50 percent in the second half of the year. The weakness we noted in EMEA in the third quarter of 2008 continued into the fourth quarter and looks likely to remain into the first part of 2009.
Smaller Transactions Now Dominate
The market momentum in 2008 was underpinned by smaller transactions rather than mega deals (those contracts awards of €800 million of more). Looking at the global picture for the full year, the number and value of mega deals was flat year on year; however, the latter half of 2008 showed a sudden pull back in the award of larger contracts. In the second half of 2008, only three mega deals valued in total at about €5.2 billion were signed globally compared with 12 contracts totalling €13.6 billion in the first six months of 2008.
Duncan Aitchison says: “To many observers, the outsourcing industry offers an early indicator of renewed confidence in the stability and growth of economic markets. When large outsourcing contract awards increase, it often means that businesses are realigning their support operations as part of their growth agenda. While market indicators don’t point to a near-term return in demand for large complex outsourcing arrangements, we believe that there will be a steady flow of smaller, more tactical outsourcing contracts signed globally. Companies are searching for ways to reduce their operating expenses quickly and outsourcing can be a valuable tool with which to effectively weather the economic storms of 2009.”
India
For many, India has come to epitomise the outsourcing industry and the Indian IT and business process outsourcing industry is now a €32 billion per year economy. The impact of the recent attacks in Mumbai and the Satyam situation are therefore topics that permeate the outsourcing industry. Geo-political risks are among the factors that many companies consider when locating operations. The outsourcing industry is commonly viewed as a mitigating factor for these risks by virtue of the ability to perform work in a distributed multi-geography delivery model. That requirement was certainly accentuated as a result of the Mumbai attacks. The effects of the sudden instability of Satyam are being addressed, at least in part, through intervention by the Indian government, but the concerns around risks to its business operations remain. This is a complicated situation that requires a balanced evaluation of alternatives.
Duncan Aitchison comments: “The damage to client confidence from the Satyam situation is not trivial, but hopefully will be limited to that one firm. In the near term, we expect that companies will try to realign the service agreements among their providers in ways that mitigate perceived risks. This is in line with the increase of focus we have seen in recent months on business resilience, which includes areas of concern such as currency fluctuations, security, data privacy, and business continuity planning that encompasses more supply geographies than just India. While threats like those in India exist anywhere in the world, the Indian outsourcing industry recognises that it must step up to demonstrate its preferred status as the destination to serve as a partner to the world’s leading companies.”
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About TPI
TPI, a unit of Information Services Group, Inc. (ISG) (NASDAQ:III, IIIIU, IIIIW) is the founder and innovator of the sourcing advisory industry, and the largest sourcing data and advisory firm in the world. We are expert at a broad range of business support functions and related research methodologies. Utilizing deep functional domain expertise and extensive practical experience, TPI’s accomplished industry experts collaborate with organizations to help them advance their business operations through the best combination of business process improvement, shared services, outsourcing and offshoring. For additional information, visit www.tpi.net.
About Information Services Group, Inc
Information Services Group, Inc. (ISG) (NASDAQ:III, IIIIU, IIIIW) was founded in 2006 to build an industry-leading, high-growth, information-based services company by acquiring and growing businesses in advisory, data, business and media information services. In November 2007, the company acquired TPI, the largest independent sourcing advisory firm in the world. Based in Stamford, Conn., ISG has a proven leadership team with global experience in information-based services and a track record of creating significant value for shareowners, clients and employees. For more, visit http://www.informationsg.com.