The global outsourcing market came out of the blocks with a strong start in 2016. According to the 1Q2016 Global ISG Outsourcing Index® released this week, global annual contract value (ACV) was up 20 percent over the first quarter of last year. This double-digit growth is tied to a continued trend toward smaller deals (those worth $40 million or less per annum) and a rash of contract restructurings, the natural result of a maturing market. The total annual value generated by smaller deals jumped 40 percent over the same period last year while the number of restructurings set an all-time record. Annual contract value for restructurings equaled $2.8 billion, a near-50 percent jump from 1Q2015.
With its best quarterly performance in four years, the Americas region essentially caught up with EMEA in the race for global supremacy as the world’s largest sourcing market. Though both EMEA and the Americas achieved roughly the same ACV ($2.8 billion) for the quarter, they did so with a vastly different volume of deals: the Americas with 217, EMEA with 160. This shows the Americas continues to be a more fragmented market than Europe, which still relies on larger deals.
The Americas experienced a second consecutive quarter in which the value of restructured contracts outpaced that of new scope deals, a rare event even though it is a mature market. In fact, the 102 restructured contracts in the Americas was more than any previous quarter, and the associated ACV was the region’s second highest in history. The fact that restructurings have exceeded $1 billion in five of the past six quarters points to a notable shift in market dynamics in which outsourcing buyers are spreading their dollars and the scope of their contracts across more providers.
What’s behind the flurry of restructurings?
The real race these numbers illustrate is the one of trying to keep up with changing customer expectations. Enterprises are finding they must continuously deploy new functionality to both attract new customers and keep existing ones, and for many, this becomes a sprint toward digitalization.
Because many large enterprises have already addressed the low-hanging fruit of cost savings in their outsourcing contracts to date, many are now directing those savings-to-spend dollars toward digital transformation projects. Deals that include automation, for example, which reduce both workload and risk in middle- and back-office processes, create a new source of savings companies can use to reinvest in other digital or legacy risk-management-focused projects.
For organizations just starting out on their digital journey, competitive pressures make spending in this area non-discretionary. And taking advantage of the digital offerings in the market, including cloud computing and automation, increasingly means enterprises must be willing to confront the complexity of “chopping and changing” components of their IT estate. Thus, restructuring numbers go up: what used to be one deal is now being strategically broken into three or four deals.
The market’s sustained interest in as-a-service offerings and subscription-based solutions adds to the case that enterprises are interested in flexibility, even at the expense of control. Separately, specialty capabilities or niche solutions that buyers once considered prohibitively challenging to integrate into their environments are now seen as viable—and vital—options for building a strong digital program. As a result of this trajectory, outsourcing buyers are becoming more and more skilled at managing a range of providers, and the traditional advantages an incumbent service provider may have had in the past are quickly eroding.
For the first time, smaller providers that have proven and industry-specific solutions are competing in circles that have traditionally been dominated by large providers. Other restructurings take another tack by shepherding buyers toward cloud-based services as a part of larger, more conventional outsourcing agreements. Enterprises that work with providers offering their own cloud proposition, for example, are taking advantage of the benefits of on-demand pricing inside the protections of a more conventional contract.
To get a fuller picture of current market dynamics and the race toward digitalization, view the 1Q16 Global ISG Outsourcing Index® presentation slides and press release on the ISG Outsourcing Index® page.
