Demand for outsourcing has never been higher.
Last week, we released the findings of our 2Q15 Global ISG Outsourcing Index™, which showed contract counts for both the second quarter and first half of 2015 reaching all-time highs. For those who have been watching the industry, this will come as little surprise. Three of the past four halves have produced the highest contract counts ever, according to our research.
With so much activity, one would think that outsourcing spending also would be on the rise, but that isn’t the case. Even though second-quarter spending, as measured by annual contract value (ACV), rebounded significantly from an abysmal first quarter, it still was down 7 percent versus last year. First-half ACV also was down, by 14 percent, thanks to that weak first quarter.
The decoupling of volume and value is hardly a recent phenomenon. Indeed, our research shows that in the seven-plus years since the start of the Great Recession, contract counts have nearly doubled while ACV has risen only modestly during that time.
Why the disconnect?
First, multi-sourcing remains all the rage. Gone are the days of the winner-take-all, long-term contract with a monolithic service provider. More and more, buyers want to engage with a larger number of smaller, niche providers that can provide specialized services with more flexibility (read: shorter contracts) at lower costs.
Second, buyers are moving more work to the cloud, paying for computing power and services only when they need them. In the last three years, the level of cloud adoption on ISG-advised transactions has nearly doubled. At first, we saw clients moving work to their service providers’ dedicated private clouds, but more recently, we see them moving work to the public cloud, as they look to avoid long-term commitments and major capital investments and instead realize the greater flexibility, scalability and agility that comes with these platforms.
Third, clients are increasingly adopting a wait-and-see attitude when it comes to emerging technologies and digital service platforms. Rather than locking themselves into large, long-term contracts, they are opting for shorter, lower-cost deals that allow them to test and selectively adopt new capabilities as they wait for the industry to shake out and the full impact of the digital revolution to emerge.
From the providers’ perspective, the digital, as-a-service revolution is clearly changing the dynamics of the global services marketplace and disrupting long-held business models. Who will be the winners and losers in this fast-changing, topsy-turvy environment?
We believe the winners will be those providers that can demonstrate strong expertise in software development as well as a deep understanding of their clients’ businesses. They will be able to pivot from infrastructure-heavy, labor-intensive offerings and adopt the same emerging technologies their clients are demanding, including analytics and automation, to reduce their own headcount and shift the value proposition they offer away from cost reduction toward revenue generation.
The losers? Those providers that are focused on wringing every last dollar from yesterday’s legacy business models and competing to the death in declining markets.
As we look to the near term, we expect renewed ACV growth in the third quarter, but the picture gets murky after that, as the seismic shifts wrought by digital disruption continue to impact the market in both expected and unexpected ways.
To get a more complete picture on current market dynamics, we invite you to view the 2Q15 Global ISG Outsourcing Index™ presentation slides and press release on the ISG Outsourcing Index™ page.
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.
