Value and volume of business pales in comparison with near-record 2014
Signs of price war emerge with drop in ACV and steady volume of smaller deals
Americas lone bright spot, posting fourth straight quarter of ACV greater than $2 billion
The global outsourcing market slowed in the first quarter of 2015 from its near-record pace last year, with contract values falling amid a growing industry price war, new research from Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company, has found.
Data from the ISG Outsourcing Index™, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show that first-quarter ACV fell 18 percent, to $5.1 billion, well below the average $6 billion in first quarters since 2006, and one of the slowest first quarters in the last decade. ISG had forecasted this weakness last quarter after several large contracts were awarded at the end of 2014.
The total number of first-quarter awards, 305, was down 7 percent from the prior year. Still, the volume of smaller deals, those with ACV of under $30 million, remained steady with the year-ago first quarter, totaling 269 awards valued at $2.5 billion. However, larger deals, those worth more than $30 million annually, declined about 25 percent in number and value (28 contracts worth $1.3 billion in ACV) from the previous year.
“The slow pace of the quarter is not a surprise, based on the activity we noted at year’s end, but we don’t view it as a portent of things to come,” said John Keppel, partner and president of ISG. “Smaller deals continue to flow, and value and volume for the trailing 12 months remains in positive territory. Still, what goes up must come down, especially against the strength of last quarter and the vigorous start the industry had in the first quarter of 2014. Across markets this quarter, we found examples of value increasingly being challenged while volume remained strong as clients sought out great deals in a buyer’s market.”
ISG found the number of new-scope awards in the first quarter was flat with the prior year, but the annual value of such deals dropped 19 percent. Restructured contract volume, meanwhile, declined 20 percent versus last year, with ACV down 16 percent.
“New scope, which usually makes a strong showing in the first quarter, had its slowest start since 2001, primarily the result of smaller awards than we’ve seen in the past,” Keppel noted. “In addition, even with a first-quarter decline in restructured contracts, it’s important to remember that restructurings are cyclical in nature, and they ended 2014 by breaking records.”
By domain, information technology outsourcing (ITO) slowed in the first quarter, with $3.5 billion in ACV awarded, off 27 percent from last year and the lowest such total for a first quarter since 2004. Conversely, business process outsourcing (BPO) saw contract volume grow 18 percent and ACV climb 13 percent, to $1.6 billion. This was the second consecutive quarter BPO had ACV of more than $1.5 billion, countering a retreat in this market in recent years.
The Americas had the strongest quarter of the three regions, with ACV up 10 percent, to $2.1 billion, the fourth consecutive quarter the region posted ACV higher than $2 billion. A total of 143 contracts were awarded in the quarter, up 27 percent. Restructured ACV reached more than $1 billion in consecutive quarters for the first time, and the value of restructured awards came in higher than that of new-scope awards, an event that has happened only twice before. Among industries, the Energy sector saw its ACV climb 125 percent and its volume soar 150 percent, as the pace of sourcing activity picks up in the face of falling oil prices. Healthcare and Pharma also had a strong quarter, with ACV more than tripling and volume up nearly 150 percent, reflecting the growing need to provide services at lower cost amid increasing regulatory and compliance pressures.
EMEA, the world’s largest outsourcing market, saw its ACV, at $2.4 billion, and its contract count, at 128, both decline about 25 percent for the quarter. This was due mainly to a drop in sourcing business in the U.K, a lull most likely caused by the run-up to the next election, and in France, which came off its best year ever in 2014. The DACH (Germany, Austria and Switzerland) sub-region, meanwhile, saw its ACV climb 65 percent. The Financial Services and Retail industries were bright spots, both recording significant double-digit increases in ACV.
In Asia Pacific, both value and volume edged down from last quarter, but dropped significantly against the first quarter of last year, when almost $1 billion in ACV was recorded and the number of large deals was more than twice that of this year’s first quarter. Among the sub-regions, Australia/New Zealand started the year with one of its weakest quarters in a decade. In contrast, India and South Asiacontinued a strong run, with ACV of $300 million this quarter, and substantially more contracts than a year ago. Across the region, only two industries saw year-over-year growth: Energy and Financial Services.
Looking ahead, ISG sees an explosion of new technologies and delivery models that will spur competition and falling prices not seen since the early 2000s. “While we are used to the ever-present competitive dynamics of the sourcing marketplace, even by our own industry’s standards we are currently witnessing some marked shifts in pricing across a number of areas as the compounded impacts of ARC (Automation, Robotics and Cloud) take hold,” said Keppel. “The unprecedented change brought about by ARC and technology innovation is creating substantial opportunity but also substantial risk. Clarity of leadership and strategy will be required to navigate these turbulent waters.”
As for 2015, ISG expects the sourcing market to rebound in the second half. “Although ACV may remain muted through the first half of this year, strength in verticals such as Energy and Transportation, along with solid results in large sourcing markets like the U.S., bode well for the second half,” Keppel said.
Now in its 50th 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.
Results of the ISG Outsourcing Index™, covering the first quarter of 2015, were presented during a conference call and webcast for media and analysts today. To listen to an audio replay of the call and view presentation slides, please visit http://www.isg-one.com/web/research-insights/isg-outsourcing-index.
About Information Services Group
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience and global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 900 employees and operates in 21 countries.
For additional information, visit www.isg-one.com.
To view an infographic summarizing these data, visit: http://www.slideshare.net/ISG_Inc/1-q15-infographic