Don’t let the third quarter fool you. The temporary dip in outsourcing action over the last three months won’t derail what we see as one of the strongest years on record for the industry.
Data from the ISG Outsourcing Index confirmed our forecast: the above-normal production in the first half of the year wasn’t sustained in the third quarter. Instead, the global market took a breather from its scorching first-half pace — annual contract value (ACV) topped $6 billion in each of the first two quarters ― with a third quarter that reverted back to historic norms as one of the weakest periods of the year. Third-quarter ACV declined by double digits in virtually every geography and segment. Compared with a strong third quarter in 2013, global ACV was down 21 percent, to $4.6 billion, while the number of contracts signed dropped 32 percent to 239 in the quarter.
We believe this slump in the numbers is only temporary – not a sign of a slowing market – as work is pushed out into future quarters. Year-to-date performance looks very strong on the tailwinds of a record-breaking first half, and from our market intelligence and knowledge of the industry pipeline, we expect a strong finish to 2014 with at least double-digit gains over 2013 levels.
Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show that, year to date, ACV is up 13 percent, to $17.1 billion. The growth is fueled by double-digit increases across most regions, service areas and contract types and sizes while contract volume is up a more modest 4 percent.
The key findings from our quarterly ISG Outsourcing Index were discussed earlier this week. For those looking for a quick snapshot, our infographic will provide an at-a-glance view of industry performance. For those wanting more detail, view the presentation slides and listen to an audio replay here.
Let’s dig a little deeper into the numbers. The declines in ACV and in the number of contract awards in the third quarter were driven by a fall-off in both new-scope and restructured deal activity. The number of mega-relationships, those valued at over $100 million, and awards in the smaller contract-value bands dipped noticeably.
By domain, information technology outsourcing (ITO) was down 23 percent from the prior year, largely because of the decline in new-scope awards. The uneven business process outsourcing (BPO) market also declined, albeit by a smaller amount, but rose in the Americas and in new-scope awards. The BPO market is now characterized by more sourcing in contact centers, facilities management and industry-specific work, having shifted away from horizontal back-office functions.
ACV in the Americas region, at $1.9 billion, was up 11 percent versus a soft third quarter last year, helped by large contracts in Canada and Brazil, even as deal count dropped by nearly 30 percent. The region’s year-to-date performance, with ACV up 18 percent, was fueled by sharp increases in the value of new-scope contracts, up 30 percent; ITO contracts, up nearly 20 percent, and BPO contracts, up 17 percent. ITO contract counts are at an all-time high through nine months, reflecting the trend toward more contracts amid increased multi-sourcing. Financial services, energy and manufacturing were bright spots among BPO industry segments.
EMEA, the world’s largest outsourcing market, mirrored the broader market and saw declines in value and deal count versus a strong third quarter in 2013. But the region looks quite healthy from a year-to-date perspective, with growth in new-scope ACV (up 12 percent) and ITO ACV (up 14 percent) driving the market. BPO value and contract counts, meanwhile, dropped by a third compared with the first nine months of 2013. Sourcing activity in EMEA continues to spread beyond the more mature markets of the U.K. and DACH, penetrating further in France, which saw sizeable awards in banking and transportation, and in Spain and Italy on the strength of activity in the automotive and financial sectors.
Asia Pacific’s record-breaking pace in the first half slowed due to a lack of large-deal activity in the third quarter, as ACV fell 27 percent and deal counts shrank by more than 30 percent. As with the other regions, the year-to-date picture in Asia Pacific is much rosier, with ACV up 60 percent, driven by growth in new-scope and restructured contracts, and ITO value that has reached a record high. Australia/New Zealand (ANZ) and Japan have been the sub-regional stars thus far in 2014. ACV in ANZ is up nearly 40 percent year to date, while Japan’s market value climbed almost 70 percent, primarily due to large awards in banking and manufacturing. China and India, meanwhile, continue their comeback years, with ACV in both markets far exceeding that of the previous year.
ISG also analyzed the growing public sector market, which as recently as five years ago held roughly the same share of the global market as the commercial sector, but has since grown to account for nearly two-thirds of global outsourcing value annually. Public sector ACV, at $39 billion, has increased 15 percent in the past year alone. Most of the activity comes from ITO, and from the U.S. and Canada, which together account for 69 percent of the global public sector market. In the U.S., growth is being spurred by Department of Defense spending, as well as from federal agencies looking to consolidate data centers and move toward shared services.
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.
