Outsourcing Market in Slowdown Mode

by CXOtoday Staff    Apr 17, 2009

Gartner expects to see a slowdown in contract signings during the first half of 2009 and possibly extending into the third quarter, largely due to the tightening of IT budgets in the fourth quarter of 2008

The largest IT outsourcing (ITO) or business process outsourcing (BPO) contract signed in 2008 was for a total contract value (TCV) of $2.5 billion to two companies - one of these was awarded to TCS. This was the first time that an Indian IT services provider was awarded the largest deal.

The two largest deals in 2008 were for the delivery of a combination of ITO and BPO services.

Since 2006 there has been a steady decline in the number of ITO and BPO deals signed in the Americas and a gradual increase in the number signed in the Europe, the Middle East and Africa (EMEA) region. In 2008, EMEA overtook the Americas as the leading geographic region in terms of volume of deals signed. In 2008, there were 162 signed in EMEA and 158 deals signed in the Americas. Deals signed that cover the global IT operations of buyers are also increasing and represented 25 percent of all deals signed in 2008.

"While outsourcing held up in 2008, we expect to see a slowdown in contract signings during the first half of 2009 and possibly extending into the third quarter, largely due to the tightening of IT budgets in the fourth quarter of 2008, and only slow loosening of budgets in early 2009," said Allie Young, vice president and distinguished analyst for Gartner. "Long sales cycles for outsourcing are the norm, depending on the complexity, scale, and scope of the outsourcing deals, which may lead to delayed signings. However, organizations with approval to outsource - and desperate to save money - may seek to move rapidly and shorten some steps of due diligence just to get the deal into place. "

The number of reported outsourcing megadeals awarded to a single service provider in 2008 was 12, an increase from 10 in 2007. In terms of megadeal TCV, the total for the 12 megadeals in 2008 was $17.1 billion, compared with $12 billion for 2007. Although 2008 reveals an increase in the TCV of 2007 megadeals, it is still lower than the amounts realized prior to 2007. Megadeals are characterized as being worth more than $1 billion.

In all outsourcing deals (not just megadeals), there is definite trend toward a greater number of deals, but for smaller TCVs. In 2008, deals below $50 million saw a clear increase over 2006 and 2007, but deals over $50 million saw a collective decline. TCV for all deals in 2008 was $42.2 billion, which, although an increase over the 2007 figure of $29.5 billion, can be attributed to the much larger volume of total deals signed in 2008.

"In economic downturns, we closely watch contract reporting as an indicator of the health of the outsourcing market," said Young. "We have seen some softness in large deal signings, but no catastrophic decline. While economic forces can change priorities, the basic drivers of outsourcing remain intact - organizations still outsource for cost, efficiency, access to skills, focus on core business, innovation, modernization and even business transformation."