The fourth quarter of 2015 turned out to be one of the strongest quarters ever in the outsourcing industry – ending a rather lackluster year on a high note – but that’s not the most surprising finding to come out of our 4Q15 Global ISG Outsourcing Index®released yesterday. What’s more surprising is the major source of growth in the quarter: nine mega-relationships – deals worth at least $100 million annually – certainly an anomaly in a market that’s clearly trending toward contracts of lesser value and shorter duration.
The longer-term trend toward more and smaller deals is evidenced by the considerable decline in annual contract value (ACV) over the last decade, most notably the 20 percent drop in average ACV between 2012 and 2015. Similarly, the average contract duration has dropped proportionally. The 3.5-year average in 2015 is a full 15 percent shorter than it was three years ago. Our research shows 2015 contract awards at an all-time high, even as ACV declined 8 percent for the year. The 23 mega-relationship awards signed in 2015 marks a new low not seen in a decade.
Behind this shift: companies want shorter contracts as they look to remain more flexible and nimble to quickly respond to rapidly changing market conditions, and they are taking advantage of a buyer’s market, with declining prices making outsourcing an even more attractive option for more companies.
That’s especially true in the information technology outsourcing (ITO) market. Almost all of the ACV shortfall in 2015 can be pegged to ITO, which declined in annual value by $2 billion or 12 percent from last year as more infrastructure moves to the more flexibly priced cloud environment.
Clearly, outsourcing continues to have a strong value proposition as we exit 2015. But advances in cloud computing and other technologies are changing the rules of the game. We’re seeing enterprises increasingly participate in what we call the Outcome Economy, in which they buy business results, not bodies or disconnected services. Companies choose the products and services they need based on outcomes that make a difference first and foremost to their customers and their topline growth, and second to their cost structure.
Not surprisingly, this shift is largely precipitated by technology. Trends like multi-tenancy, automation, embedded technology and the return of shadow IT are, quite literally, reinventing our industry. To stay relevant, CIOs and their leadership teams must be well-acquainted with the products and services their organization sells, in addition to datacenters and networks, so they can drive competitive technology into it every day. For service providers to survive in the Outcome Economy, they must embrace the change and perhaps even reconsider to whom they sell.
This profound shift in the industry may mean we see only a tepid start to 2016, but we believe activity across all regions will pick up in the second half. Now that enterprises have realized the flexibility and value of shorter, smaller contracts, they won’t give that up. We expect the trend toward lower contract values and shorter-term commitments to continue.
To get a fuller picture on current market dynamics, view the 4Q15 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.
