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TPI Index reveals softness in outsourcing contract awards
 
Third Quarter TPI Index reveals a slowdown in outsourcing,
but the market is expected to rebound and the outlook is positive
 
London, 16 October 2008 ― TPI, the largest sourcing data and advisory firm in the world and a unit of Information Services Group Inc. (ISG) (NASDAQ:III, IIIIU, IIIIW), a leader in the information-based services industry, reveals a slowdown in the global outsourcing market in the past three months, but believes that 2008 will still surpass 2007 in terms of the volume and value of outsourcing contracts signed globally.
 
The TPI Index for the third quarter of 2008 shows that only 128 contracts were signed globally totaling €11.5 billion – the weakest quarter for total contract value of outsourcing deals in the past six years. Only one mega deal (a contract valued at €800 million or greater) was signed in the past quarter, compared to more than €7 billion in each of the past three quarters.
 
However, looking at the data year to date the volume and value of outsourcing contracts is exceeding metrics for 2007 and all indicators, including the recent announcement of the TCS-Citigroup mega deal, suggest that the full year of 2008 is on course for a strong overall result – beating 2007’s total of €68 billion.
 
Duncan Aitchison, partner and president, TPI EMEA comments, “While the TPI Index reveals a slowdown in outsourcing activity in the past three months, we believe that this is temporary and that 2008 is still set to post strong annual figures, surpassing 2007. Third quarters are traditionally weak, and looking ahead, we see considerable activity in the market.”
 
Americas outperform EMEA for first time in nearly two years
 
While outsourcing activity has been driven primarily by activity in Europe, the Middle East and Africa (EMEA) in recent times, this quarter marked a sharp decline. In EMEA, 56 contracts totalling almost €4.4 billion were signed in the third quarter of 2008 compared with 75 contracts totalling €14.8 billion during the second quarter. As a result, looking at global market share, the Americas actually outperformed EMEA in terms of total contract value awarded for the first time in nearly two years.
 
Duncan Aitchison adds: “It seems likely that the sharp decline in outsourcing in EMEA in the past quarter is a temporary pause following the most intensive nine months of outsourcing activity in the region’s history. We are aware of several large transactions already underway in Europe and, therefore, expect to see a stronger performance in the fourth quarter.”
 
Outsourcing in Financial Services
 
So far this year, outsourcing in the financial services sector is down in both EMEA and the Americas and flat in Asia-Pacific. Fewer contracts were signed and those signed were smaller in value due largely to more limited scope of services rather than shorter contract durations. Among financial services institutions, banks exhibit this profile most acutely.
 
The average total contact value of a financial services sector outsourcing contract in EMEA fell by 37 percent to €107 million so far this year. The banking sector has experienced a decline of 62 percent in total contract valued signed in EMEA since January this year, while the insurance sector saw a 34 percent fall.
 
Duncan Aitchison says: “The weakness in outsourcing in the financial services sector since the beginning of the year is a result of the uncertainty and recessionary influences first felt a year ago in the third quarter of 2007. Financial institutions, particularly banks, responded to the first wave of the credit crunch with fewer or delayed outsourcing decisions.
 
“The increased uncertainty stemming from today’s global economic crisis has yet to affect the outsourcing industry that serves the financial services sector. TPI data for the just completed quarter and year-to-date, represents outsourcing initiatives begun in less turbulent times.” 
 
While TPI expects a more normal volume of contracts for the financial services sector in the next quarter, it will take a few months for the effects of current market reconfigurations to manifest in outsourcing contracts, and TPI therefore expects to see this year’s variability in financial services outsourcing repeat itself in 2009.
 
In the near term, restructuring within the financial services industry may bring opportunities for outsourcing service providers to acquire divested operations – for example the recent acquisition by TCS of Citigroup’s BPO operations. It is the service providers with the strongest balance sheets, cash positions and access to capital who will be best able to capitalise on these opportunities.
 
Service providers may see their sales cycles lengthen, some rationalisation of service provider responsibilities in multi-sourced relationships, and the inability to command higher prices from clients. The current wave of mergers and failures also means that the number of financial services firms that service providers can sell to is getting smaller. On the other hand, TPI believes that financial services organisations will look to outsourcing to achieve near-term cost reductions, facilitate restructuring and ultimately provide for growth out of the downturn.
 
Duncan Aitchison continues: “Prolonged uncertainty in the financial services sector could dampen or delay decision making about outsourcing, but whether it will spread to other industry sectors is difficult to predict. The outsourcing industry, as a result of the current financial turmoil, will need to adapt to changing buyer circumstances and demands. In financial services outsourcing in particular, there will be positioning to achieve synergies for realigned institutions, participation in the divesting of non-core operations, and ultimately the return to growth when a more stable environment emerges.
 
 
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