Global sourcing slows in first quarter amid a 'growing industry price war'

6 May 2015

The global outsourcing market slowed in the first quarter of this year with average contract values down 18 per cent year-on-year, according to research.

Information Services Group (ISG) said contract values have been falling amid a growing industry price war, and are now far from the near-record performance of last year, according to research.

The ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million (£3.36 million) or more, shows that first-quarter ACV fell to $5.1 billion (£3.43 billion).

This is well below the average of $6 billion (£4 billion) in first quarters since 2006, and one of the slowest first quarters in the last decade, ISG said.

The number of contracts awarded in the first quarter of this year was down 7 per cent from the same period last year. The volume of smaller deals – those with an ACV of less than $30 million (£20 million) annually – was steady year on year. The number of larger contracts was down 25 per cent.

ISG partner and president John Keppel said that the slow pace of the quarter was not a surprise, based on activity at the end of last year.

“Smaller deals continue to flow, and value and volume for the trailing 12 months remains in positive territory,” Keppel said. “Still, what goes up must come down, especially against the strength of last quarter and the vigorous start the industry had in the first quarter of 2014.

“Across markets this quarter, we found examples of value increasingly being challenged while volume remained strong as clients sought out great deals in a buyer’s market.”

ISG found the number of new-scope awards in the first quarter was flat year on year, but the annual value dropped 19 per cent. Restructured contract volume declined 20 per cent, with ACV down 16 per cent.

Across the sectors, IT outsourcing slowed in the first quarter, with $3.5 billion (£2.4 billion) in ACV awarded, down 27 per cent from last year, and the lowest first quarter since 2004. Business process outsourcing saw contract volume grow 18 per cent and ACV climb 13 per cent, to $1.6 billion (1.1 billion). In the Americas ACV rose 10 per cent, to $2.1 billion (£1.4 billion), with the number of contracts up 27 per cent.

The energy sector saw its ACV climb 125 per cent and its volume up 150 per cent, as the pace of sourcing activity picks up in the face of falling oil prices.

Healthcare and pharma also had a strong quarter, with ACV more than tripling and volume up nearly 150 per cent. This reflected the growing need to provide services at lower cost amid increasing regulatory and compliance pressures, ISG said.

In EMEA, contract numbers and ACV both declined around 25 per cent over the quarter, with the latter at $2.4bn (£1.6bn). A lull in the UK market, caused by the run-up to the election, and a slowdown in France, were to blame, ISG suggested.

In Asia Pacific, both value and volume edged down from last quarter, but dropped significantly against the first quarter of last year, when almost $1bn (£0.7bn) in ACV was recorded and the number of large deals was more than twice that of this year’s first quarter.

ISG expects the sourcing market to rebound in the second half of the year.

“Although ACV may remain muted through the first half of this year, strength in verticals such as Energy and Transportation, along with solid results in large sourcing markets like the US, bode well for the second half,” Keppel said.

ISG predicted that an explosion of new technologies and delivery models would spur competition and falling prices.

“The unprecedented change brought about by ARC (Automation, Robotics and Cloud) and technology innovation is creating substantial opportunity but also substantial risk,” said Keppel. “Clarity of leadership and strategy will be required to navigate these turbulent waters.”

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