John Keppel, Partner and President, ISG North Europe provides an overview of the 2014 outsourcing market, and shares predictions for 2015.
We saw confidence in the European outsourcing market pick up in the second half of 2013, and this continued to improve throughout 2014. In fact, 2014 is on track to be one of the strongest – if not the strongest – years for outsourcing in EMEA in a decade.
One of the most interesting things we have witnessed this year is that outsourcing is no longer a Northern European phenomenon. Activity has become more proliferate across the continent – particularly in France, Spain and Italy. In the third quarter of this year, French annual contract value (ACV) was up 250% on the same period last year, while Southern Europe reached its highest ever level of ACV. By contrast, the mature UK market broadly remained stable.
We’re also seeing a growing move towards deriving greater value from contracts. Whether this is through Service Integration and Management (SIAM) or utilising Total Business Management (TBM) tools, CIOs are beginning to step away from simple IT management and are moving towards a role that has a greater focus on business alignment, which is critical for maintaining their relevance to the organisation.
The Global Business Services (GBS) function is also becoming more prominent. Although still in its early stages, this will become more important to organisations. What will drive success, however, is the function’s ability to deliver results – with a framework in place that drives, manages, risk mitigates and controls execution.
ITO and BPO
There has been a resurgence in ITO, which is somewhat unsurprising given ever increasing volumes of IT consumed. Indeed, in the third quarter of 2014, the volume of ITO contracting in the EMEA region hit an all-time high, with contract counts up 16% on the previous year.
More surprising is the pronounced decline in Business Process Outsourcing (BPO) activity. BPO ACV grew steadily through the global downturn as companies looked to save costs across the organisation, but as the economic outlook has brightened, BPO values have fallen. In general, EMEA has not been quick to adopt large HR, F&A and other BPO towers but the growth of cloud and other new technologies could see a wider take up of business process as-a-service in the next couple of years.
The UK public sector has continued its outsourcing journey; spending nearly double the commercial sector, mainly through the award of larger, higher-value contracts. In contrast to the commercial sector, the public sector has seen a rise in mid-market contracts, as a result of the complexity of the services required and a lack of appetite for utilising cheaper, offshore resources. It will be interesting to see, over the next two years, whether the drive to procure services from small to medium enterprises via the G-Cloud will cause a shift to smaller contracts. The majority of activity is currently concentrated in central government, while local government takes the second largest share of the market.
We expect to see continuing growth in public sector outsourcing activity as initiatives like Value for Money make outsourcing a more attractive proposition, while the Government’s G-Cloud initiative opens the market to a greater number of specialist service providers. The forward view
Looking ahead, we expect that the outsourcing market will continue to grow, as organisations slowly regain confidence post-recession. The challenge for buyers will be to understand how they can get the most value from their outsourcing efforts, and to understand the real business impact. We believe that this will start to gain momentum next year.