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.
- The record of commercial outsourcing contract awards (with minimum total contract value (TCV) of at least US$25M) for the first half of 2008, compared with previous first halves, came in as the best by number of contracts, TCV and annualized contract value (ACV) in more than 10 years.
- EMEA's robust performance supported the first-half record, with a dramatic Y/Y increase in TCV caused mainly by EMEA's large share of mega deals and mega relationships. In fact, 10 of the 13 mega deals awarded so far in 2008 have been made by EMEA-based companies.
- The telecom and manufacturing sectors in just this half surpassed their TCV markers for all of 2007. Even without a strong showing by the financial services sector, the broader market allowed for the historical highs.
- For BPO, the half-year witnessed more contracts with greater TCV and ACV than in three years. Some atypical BPO processes gained traction, while HRO and F&A outsourcing remained sluggish.
- An increasing number of service providers won at least one contract award in the first half, and India-heritage and telecom providers came into view as substantial contenders for multiple contract awards.
- Considering the vigorous half-year TCV and ACV record in 2008, we estimate that annualized revenue will grow by about 10% for the full year to over $87B. The annualized revenue picture is truly one of greater-than-anticipated growth.
If the TCV trend set over the past three quarters is maintained - and we see little indication to the contrary - then the TCV awarded in 2008 has the chance to hit an all-time high.
So, where's the paradox?
Well, I'm no stock analyst but the reports from India-heritage providers seem to be telling a very different story regarding their recent sources of revenue. Most publicly-traded India-based providers are reporting a mix of some sobering realities and forward-looking caution. Here are some contrasts for example:
- Revenues derived from European clients are not especially strong as the larger contract awards in EMEA have not gone to the India-based providers.
- They're reporting growth in the U.S. due to project-based work which has floated the boats in the tepid U.S. outsourcing market.
- Telecom is a soft sector for many of the India-based providers, and so is transportation. Good news might be in the offing, as companies in the telecom industry are awarding new outsourcing contracts at a healthy pace.
- Second half confidence does not seem high, as the contract award levels are surging and revenues from those new awards will be seen coming online in the coming quarters.
Look at who has been winning so far in 2008. The eight providers who have won 10 or more contracts so far in the first half are: Convergys, Infosys, Wipro, HP, BT, TCS, EDS, and IBM. The three biggest India-based providers are right in the middle of the top tier.
One of the biggest risks to the India-based providers is the exuberant expectation of immediate demand recovery among client segments. Most of the providers have weathered prior slowdowns and emerged in a favorable position to service the growth needs of an improving economy.
I think there's a fair amount of expectation-management going on!
