Global outsourcing market begins to show sign of slowing down

NEW DELHI, INDIA: Everest Group, an advisory and research firm on global services, unveiled the findings of its quarterly report on the global outsourcing and offshoring industry- Market Vista: Q3 2011. The report highlights that the global outsourcing and offshoring market is going through a sluggish phase, marked by a drop in transaction volumes and new deal signing during the third quarter this year. This has been the first significant decline in the number of transactions for the first time in four quarters.

The market witnessed 472 outsourcing deals compared to 508 and 516 transactions in the Q1 and Q2 of this year, respectively. While there was a dip in transaction deals by 9% on a Q-on-Q basis, Q3 global transaction volumes reached about US$2.7 billion in annual contract value (ACV), an increase of 6 percent over the previous quarter, primarily due to signing of a few large-size contracts. Compared to Q2 2011, the market saw a decrease in BPO transactions by 12 percent and ITO transactions by 7 percent.

On the captive front, following a record spike in captive announcements last quarter at 33 setups, captive activity also fell back to a more “normal” level of 20 setups.

“While there are some signs to show that the global outsourcing and offshoring market is beginning to slow down, it is still early to comment on how the overall global market scenario will shape up. We will need to see a few more quarters to determine if this is a momentary blip or the beginning of a downturn trend, “said Amneet Singh, Vice President, Global Sourcing. “From an India perspective, the country remains competitive as an offshore delivery location with buyers and service providers continuing to establish delivery centres in multiple cities in India”, he added.

“Despite a decline in transactions, high offshore location activity provides indications that the outlook for the global sourcing market continues to remain cautiously optimistic in the medium-to-long term duration. Besides leading offshore locations such as India and the Philippines, there has also been interest in newer locations such as Poland which has emerged as a credible location for non-voice BPO and high-value IT services. Key growth drivers for interest in Poland include availability of skilled workforce with multi-lingual skills, moderate cost savings with source geographies and cultural affinity with Mainland Europe,” said Salil Dani, research director, Global Sourcing.

Other third quarter 2011 findings for the global services market include:

* The BFSI (banking, financial services and insurance) sector continued to lead transaction activity and the MDR (manufacturing, distribution and retail) vertical saw transaction volumes rise by 8 percent. While there was a large drop in deals signed by government and defense organizations, the energy and utilities sector saw the largest percentage increase in contract activity.

* Both transactional and ACV volumes marginally decreased in North America and Continental Europe whereas declines were sharper in the United Kingdom and Rest of World (Asia Pacific, Middle East, Africa and Latin America).

* Three megadeals, each valued at over $1 billion in total contract value (TCV), were signed as compared to four in the first quarter and none in the second quarter.

* India dominated the captive market but considerable activity also was witnessed in Europe, Middle East/Africa and Rest of Asia. The first major captive divestiture of the year occurred during the quarter.

* Offshore activity saw 46 delivery centres established in the third quarter compared to 38 in the previous quarter.

* Service providers’ consolidated revenues increased over the second quarter, but consolidated margins fell over the same period. (Financials lag other service provider activity by one quarter).

Everest Group’s quarterly Market Vista reports provide data and analysis of deal trends in the outsourcing and offshoring market, captive landscape, current and emerging locations and key service provider intelligence insights. Everest Group’s industry trends research complements the Market Vista reports through quarterly updates focused on industry-specific global sourcing data, developments and insights across the BFSI, Telecom, Technology, MDR (manufacturing, distribution and retail), Healthcare, Energy and Utilities, Technology, and Telecom sectors.