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Enterprise buyers in the world’s major sourcing markets continue to push for shorter contracts at lower cost – leading to flat overall value globally in the third quarter amid a surge in volume, according to the latest market data from Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company.
Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show 344 contracts were signed in the third quarter, up nearly 20 percent from the prior year, but down from the record 448 contracts signed in the second quarter of 2015. ACV in the third quarter came in at $5.6 billion, level with the prior year, but down 9 percent versus the second quarter.
In the quarter, there were five mega-relationships (contracts valued at more than $100 million annually), bringing the year-to-date total to 14, the lowest such figure through three quarters in the last decade. At the other end of the spectrum, contract counts and ACV for deals valued at less than $40 million both reached record highs in the first nine months. All told, the number of awards year to date is at an all-time high of 1,094, up 8 percent from the same period last year, even though ACV was down 11 percent, to $16.8 billion.
“After suffering through one of the weakest quarters in recent memory at the start of the year, then rebounding to end the half on a positive note, the market slid back in the third quarter, falling below the $6 billion ACV threshold of market health,” said John Keppel, president and partner of ISG. “The market trend is continuing toward smaller deals, as enterprises increasingly buy specialized services from smaller, niche providers, and avoid getting locked into big, long-term contracts to maintain the flexibility they need to take advantage of fast-changing technologies, lower pricing and evolving operating models.”
The value of new-scope contracts, totaling $3.8 billion, was up 8 percent from the prior year, while restructured contracts slid 13 percent for the quarter, to $1.8 billion. Year to date, both new-scope and restructured-contract ACV were down 11 percent, largely attributable to a slowing Manufacturing sector and a flat performance from Financial Services.
By domain, the third quarter saw the rise of business process outsourcing (BPO), with ACV up 53 percent to $2.0 billion, fueled in large part by a sharp increase in contact center outsourcing and industry-specific BPO. Meanwhile, the value of information technology outsourcing (ITO) contracts dropped 15 percent for the quarter, as large infrastructure deals gave way to smaller cloud and other As-a-Service contracts.
By region, the Americas continued its steady, strong performance, logging its seventh consecutive quarter of ACV above the $2 billion mark. Although ACV, at $2.4 billion, was essentially flat with the prior year (down 1 percent), the number of deals surged 31 percent to 165, reflecting a continuing trend toward smaller contracts spread across a broad base of buyers. Year to date, the U.S. has seen contract levels increase 26 percent, on 4 percent higher ACV. By contract type, new scope ACV is down 5 percent year to date, while the ACV of restructured contracts hit its second-highest mark in the last decade. Among industries, through the first nine months, Business Services and Retail posted strong ACV, and Travel & Transport reached an all-time high, while Financial Services and Energy pulled back their spending.
EMEA produced $2.7 billion in ACV for the quarter, even with the prior year, while contract counts rose 7 percent, to 139. It was the eighth time in the last nine quarters the region has topped the $2.5 billion ACV mark. Among markets, ACV in the U.K. held essentially steady year to date (down 2 percent), even as contract counts climbed 35 percent. Conversely, the DACH and Benelux sub-regions have notched gains in ACV, but not in the number of awards. Eastern Europe, meanwhile, posted a 13 percent gain in ACV, with deal counts soaring 90 percent off a small base. Elsewhere, both the Nordics and France were off from the prior year in ACV and contracting levels. By industry, Financial Services was the strongest performer, with ACV up 35 percent and contract activity up 10 percent year to date. Contracting activity also was up sharply in Telecoms and Retail, but with ACV at or slightly below prior-year levels. Manufacturing, meanwhile, sank to its lowest level since 2007, with ACV and deal counts dropping precipitously versus the first nine months of the prior year.
ACV in the Asia Pacific region rose 13 percent, while contract counts jumped 25 percent for the third quarter. Unlike the Americas and EMEA, which are compensating for a lack of large deals with increased contracting activity, Asia Pacific has seen broad stability in the number of deals over the last five years. Three-quarters of the region’s activity year to date comes from ITO, with more than half of those deals focused on standalone applications. The region’s largest market, Australia/New Zealand, has seen its ACV drop 41 percent and its contract levels fall 8 percent year to date, while India, which has stepped up to lead the region in recent quarters, saw a 7 percent increase in the number of awards, but a 4 percent drop in ACV in the same period. By industry, the region’s largest, Telecoms, saw its ACV decline 16 percent year to date, even as the number of awards in this sector rose 5 percent. Manufacturing and Financial Services saw sharp declines in ACV, down 62 percent and 21 percent, respectively.
“Looking forward, we expect an active finish to this year and a strong start to the next, with many awards in the Americas and EMEA,” said Keppel. “But even a robust fourth quarter will not be enough to close the current year-to-date ACV gap. We expect the industry to fall short of 2014 levels by some 7 percent to 10 percent. Deal values will remain small as businesses focus on areas such as security, digital and cloud. Long term, even though the market is continuing to shift in ways that are difficult to predict, we still rely on the Americas and Europe and our traditional sectors to drive market growth.”
Now in its 52nd consecutive quarter, the ISG Outsourcing Index® provides a quarterly review of the latest sourcing industry data and trends for clients, service providers, analysts and the media. For more than a decade, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance.