It's been a wild year for outsourcing.
The pace of commercial contracts is stronger than ever in Europe and Asia. Indeed, for the first time ever, Europe saw more outsourcing contracts awarded than the rest of the world combined.
The offsetting news is a
dramatic decline in the rate of outsourcing contracts awarded in the Americas, as measured by total contract value, or TCV. Look at the trend line:
Our research spotted
contracts that have shorter terms and are more narrowly focused, two factors
that explain the regional differences. The average outsourcing contract award
in the Americas during the quarter carried a value of just under $155M, 38% less than the
average value for the same period in 2006. In contrast, contract values are climbing in Europe and Asia, as are the average duration of engagements.
What's going on?
Discussions with the buyers
of outsourcing confirm that they are tending to contract for effort – headcount
and hourly wages - rather than outcomes in some infrastructure services,
especially application development and business processes. This trend is apparent
more in the Americas than in other regions. Clients are more often opting to award contracts for
access to labor at favorable pricing, rather than go through the effort to
contract for defined services. The data bear this out.
At the same time that total
contract values awarded in the Americas dropped by almost 54% from where the industry stood one year ago, the major India-based providers have seen their Americas-based revenues grow by 37% on a year-over-year basis.
That stat speaks volumes:
The India providers are doing well in the Americas at a time when the region
is not performing as strongly as the rest of the world. The reason why is that major
India-based providers are using a "penetrate and radiate" strategy very
effectively: Start small with individual clients and grow the business reach
over time.
From a client perspective,
the ease of contracting and the appeal of low cost labor are just too strong to
ignore. I should also point out that
while we typically talk about this model from the perspective of India-based
service providers, multinational firms have made significant investments that
allow them to compete head to head in the offshore marketplace.
This film is far from over,
however: We see a stronger fourth quarter and a decent pipeline of new
outsourcing demand going into the New Year. Europe likely will remain the
strongest market, but the demand in the Americas looks to be improving.
