IT services contract activity drops to ten-year low
In 2012, the number of IT services contracts tracked by Ovum fell to its lowest level for ten years, as the industry continued to struggle in the aftermath of the global economic downturn. The lack of activity also contributed to a sharp fall in annual total contract value (TCV), which was down 14 per cent on the previous year at $96.8bn, its lowest level since 2002.
The number of publicly announced IT services deals has now fallen in each of the last four years, with annual deal volume dropping by one-third between 2008, when well over 2,000 contracts were tracked, and 2012, when the total was fewer than 1,500. It suggests that, far from being a catalyst for outsourcing as many experts had predicted, the recession has in fact had a negative impact on IT services contract activity.
The private sector has been particularly badly affected
Ovum’s data, derived from its IT Services Contracts Analytics tool (which tracks all publicly announced deals valued at $1m or more), highlights the scale of this impact, particularly on the private sector. The effects were first felt in 2009, when the number of deals awarded by businesses globally fell nine per cent to 1,073 from a pre-recessionary peak of 1,175 in the previous year. There was also a noticeable shift towards smaller deals by value in 2009 as enterprises across vertical markets, facing an uncertain future, became more cautious about committing to large-scale projects. Just five megadeals (defined by Ovum as contracts with a total value of $1bn or more) were announced during the year, compared to 12 in 2008, resulting in average contract value falling ten per cent on the previous year.
Since 2009, private sector deal volume has continued to fall, with the number of deals being tracked dropping by 11 per cent in 2010 and a startling 20 per cent the following year. The pace of decline did slow somewhat in 2012, when the annual total of 635 publicly announced contracts represented a 17 per cent fall from the previous year. However, it also represented the lowest volume of deals since 2001.
Perhaps the best illustration of the damage done by the economic downturn can be found in North America, where the number of deals awarded has fallen by 57 per cent between 2008 and 2012. Amidst the gloom, vendors can take some heart from the fact that the economic situation in the region is steadily improving, although the recovery remains fragile and it may take some time before it has a noticeable effect on contract signing activity.
Eurozone crisis casts a shadow over Europe
While economic forecasts give cause for cautious optimism around the IT services market in North America, the outlook for Europe is somewhat bleaker. In 2012, both private sector deal volume and TCV fell sharply, and Ovum’s data suggests that a major factor behind this was the economic crisis affecting the 17 counties that make up the eurozone. For example, TCV in the eurozone was down 60 per cent on the previous year in 2012, compared to a drop of just eight per cent across non-eurozone European economies. With no end to the turmoil in site, it is likely that the crisis will continue to affect the scope of contract activity in the region for a number of years to come.
Even outside the eurozone, the economic outlook in the rest of Europe is uncertain. The UK, for example, is the region’s largest IT services market, but the country’s economy is expected to only narrowly avoid falling into an unprecedented triple-dip recession when figures are announced later this month. It is likely that many global vendors will increasingly seek to tap into the potential of regions such as the Nordics where non-membership of the eurozone has shielded Denmark, Iceland, Norway, and Sweden from the worst effects of the sovereign debt crisis.
Vendors need to look beyond traditional geographic markets
With private sector deals becoming scarcer in traditional key markets across Europe and North America, vendors must be prepared to move into other geographies. For example, Ovum’s contracts data shows that IT services firms are already tapping into the considerable opportunities available in South and Central America. Of the six megadeals announced by enterprises in 2012, two of them were awarded by Brazilian firms (banking giant Caixa Econômica Federal and conglomerate EBX Group), while a third involved Mexican-headquartered building materials supplier Cemex. In contrast, just one megadeal was awarded by a European business in 2012 (CSC’s applications services deal with Zurich Insurance Group).
Ed Thomas is a Senior Analyst within the Ovum IT Services team. His specific area of focus is business process outsourcing (BPO), especially around the knowledge services area. Ed is also responsible for managing and maintaining Ovum’s IT Services Contracts Analytics tool.
During his time at Ovum, Ed has written numerous reports on specific areas of the IT services market. He has covered a range of IT outsourcing, consulting, and BPO trends, including merger and acquisition activity, contract awards, and results analysis. Many of these reports were driven by one-on-one interviews with key decision-makers within the global IT industry.
Most recently, Ed’s research has encompassed a range of topics, including the latest trends in procurement outsourcing, and the development of the legal process outsourcing market. He has also produced a series of reports on finance and accounting outsourcing based on a major primary research project conducted by Ovum. In addition, Ed continues to produce regular publications analyzing IT services contract signing activity..