Industry Research : Shorter, Cheaper Sourcing Contracts On the Up, Says Report
Enterprise buyers in the world’s major sourcing markets continue to push for shorter contracts at lower cost, according to data from ISG’s Outsourcing Index.
The index, which measures commercial outsourcing contracts with annual contract values of $5million or more, showed 344 contracts were signed in the third quarter, up nearly 20 per cent from the previous year, but down from the record 488 contracts signed in the second quarter of this year.
Figures for the third quarter also pushed the deals valued at less than $40million into record highs for the first nine months of the year. At the other end of the spectrum there were five mega-relationships (contracts valued at more than $100million annually), bringing the year-to-date total to 14. Overall, the number of awards was at an all-time high of 1,094, up 8 per cent from the same period last year, even though annual contract value was down 11 per cent, to $16.8 billion.
John Keppel, president and partner of ISG, said: "The market trend is continuing toward smaller deals, as enterprises increasingly buy specialised 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, totalling $3.8billion, was up 8 per cent from the prior year, while restructured contracts slid 13 per cent for the quarter, to $1.8billion. Year to date, both new-scope and restructured-contract annual contract values were down 11 per cent, largely attributable to a slowing manufacturing sector and a flat performance from financial services.
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The third quarter also saw the rise of business process outsourcing (BPO), with annual contract values up 53 per cent to $2billion, fuelled in large part by a sharp increase in contact-centre outsourcing and industry-specific BPO.
By region, the Americas continued its steady performance, logging its seventh consecutive quarter of annual contract values above the $2billion mark. The number of deals surged 31 per cent to 165, reflecting a continuing trend toward smaller contracts spread across a broad base of buyers. EMEA produced $2.7billion in annual contract values for the quarter, while contract counts rose 7 per cent, to 139. It was the eighth time in the last nine quarters the region has topped the $2.5billion annual contract values mark.
Annual contract values in the Asia Pacific region rose 13 per cent, while contract counts jumped 25 per cent for the third quarter. "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. "Deal values will remain small as businesses focus on areas such as security, digital and cloud."
Posted by Veronica Silva Cusi, news correspondent
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Published: Monday, November 2, 2015
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