What goes up must come down. After a near-record 2014, it’s no surprise to us that the global outsourcing market got off to a slow start in the first three months of 2015, according to data from the ISG Outsourcing Index™ released yesterday. The fourth quarter of 2014 was one of the best ever, a period in which several large deals were signed, and comparisons with last year’s vigorous first quarter were difficult, to say the least.
But what’s perhaps more noticeable about the weak first quarter are the signals we’re seeing of an emerging price war, including a slowdown in large deal activity (the number of contracts worth $30 million a year and above fell 25 percent), the steady pace of smaller deal signings (those worth under $30 million annually held even with the prior year), and declining average annual contract value (which fell 18 percent, to its lowest first-quarter level since 2006). Information technology outsourcing, a bellwether of the market, had its weakest start to the year in the last decade.
A blip in the market? Our general observations and benchmarking data suggest otherwise. Though competitive dynamics are endemic to the sourcing marketplace, the ISG Outsourcing Index™ reveals some shifts in pricing that are somewhat surprising—even to us. The compounded impacts of automation, robotics and cloud are taking hold more rapidly and broadly than anticipated. For example, the number of new-scope awards in this year’s first quarter was the same as last year’s, but the annual value of such deals dropped 19 percent. ISG Benchmark data for the past four quarters reveals price declines across the board, with the greatest in commodity areas like shared storage, which has fallen by more than 20 percent, and other service towers, where unit prices are declining by double digits.
As enterprises increasingly look to automation, robotics and cloud technologies for new standards of flexibility and competitive advantage, service providers are quickly moving to dynamic, on-demand models that supplant on-premises, fixed-pricing models. Traditional providers are hastening to transition services to the cloud. New providers are unfurling business models that offer software, infrastructure and platform-as-a-service, and top-tier public cloud vendors are leveraging economies of scale that exerts further downward pressure on prices.
Is all of this a harbinger of doom? Hardly. Smaller deals continue to flow, and value and volume for the trailing 12 months remains in positive territory. Nonetheless, the signs of downward pricing pressure, we believe, are indicative of a broader reset of the marketplace. Buyers and sellers should get ready for an explosion of new technologies and delivery models that will spur price drops we haven’t seen since the early 2000s.
Falling prices don’t necessarily mean 2015 will shape up to be one of the softest years on record. While global annual contract value (ACV) may remain muted through the first half of 2015, strength in verticals such as Energy and Transportation, along with solid results in large sourcing markets like the U.S. (where ACV grew 10 percent in the first quarter, climbing above $2 billion for the fourth consecutive period) and the DACH (Germany, Austria and Switzerland) region, bode well for the second half.
We presented the 1Q 2015 ISG Outsourcing Index during a conference call and webcast for media and analysts on April 16. For more details, view presentation slides, through April 23, on the ISG Outsourcing Index™ page. Or read the press release.
About the authorJohn is a proven executive leader with strategic, transaction and post-transaction experience. John has helped many large, global enterprises introduce and cultivate innovation as a part of the transformation process. Many of John’s projects have led to groundbreaking transactions, particularly in the UK Life and Pensions market, where John is a sought after C-suite advisor in the strategic sourcing of insurance operations. John has also conducted significant transactions in both IT infrastructure and applications environments. As a Partner and President, he sits on the ISG Executive Board and leads ISG EMEA and Asia.
