Enterprise buyers today are like urban pedestrians shopping for dinner, stopping to get this ingredient in one specialty food market and that ingredient in the other. They are not interested in buying ahead or buying in bulk; they want it now and they want it fresh.
This is a trend we first observed many quarters ago. And one that our data continue to confirm. The 3Q15 ISG Outsourcing Index® released just yesterday shows that, though deal counts were up 20 percent over third quarter 2014, annual contract value (ACV) was flat. Year to date, contract volume reached an all-time high, yet ACV of $16.8 billion is well shy of this time last year.
The schism between value and volume was felt across regions. The Americas saw as much as a 31 percent hike in the number of contract awards, but its ACV, along with that of EMEA’s, was essentially flat. Asia Pacific, a relatively small market, was the only region to see a climb in year-over-year contracting values.
The crux of it? Shorter contracts of lower value.
Deals worth less than $40 million in ACV are driving the market in a real way for the first time. More and more, enterprises are turning away from expensive, long-term deals with monolithic providers to engage with smaller, niche firms that offer specialized services. In fact, only 14 mega-relationships have surfaced so far this year. This number—the lowest in a decade—is one of the primary factors for this year’s decline in ACV.
It’s no surprise that technology is the catalyst here. The accelerating rate of change is setting a fast pace, and service providers and delivery models are busy trying to keep up. Large legacy infrastructure contracts are increasingly a thing of the past as enterprises move more and more work to the cloud and to software-as-a-service providers. The name of the game is flexibility and agility. Buyers want it fresh and they want it now.
Compared to a robust end to the first half of the year, the performance this quarter looks weak, but several sectors posted standout performances, including Retail and Transportation in the Americas and Financial Services in EMEA. And, notably, global business process outsourcing (BPO) ACV was up more than 50 percent in the third quarter, with particular growth in contact center outsourcing.
Looking forward, we expect an active finish to this year and strong start to the next, driven by awards in the Americas and EMEA. But even a robust fourth quarter will not be enough to close the current year-to-date ACV gap. We expect the industry to fall short of 2014 levels by some 7 percent to 10 percent. We believe deal values will remain smaller than in the past, and more will be spent on advancements in security, digital and cloud.
Though the market is continuing to shift in ways that are tough to predict, we still foresee the Americas, Europe and our traditional sectors driving market growth, even if it is one fresh ingredient at a time.
To get a fuller picture on current market dynamics, view the 3Q15 Global ISG Outsourcing Index® presentation slides and press release on the ISG Outsourcing Index® page.
About the author
John 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.
