Q&A: Duncan Aitchison, TPI
Duncan Aitchison is Partner & President EMEA at business transformation and sourcing advisory firm TPI. We spoke with Duncan at the start of August to get his take on the key findings of TPI’s 2Q11 EMEA index, looking at trends in contract value in key outsourcing sectors.
Outsource: Duncan, give us an overview of the 2Q11 Index.
Duncan Aitchison: I think you can see from the broad numbers that from a global perspective – and then certainly both from a quarterly perspective as well as a half-yearly perspective – the outsourcing market is not necessarily looking too fantastic just at the moment. It’s still off the pace quite substantially compared with this point last year – a lot of that has been driven out by the weakness of demand in the US specifically. In Europe, and in Asia, we are seeing reasonable demand, in terms of the some improvement over the positions last year; even though this quarter might not have been too spectacular in either of these two territories, over the last six months, the market has been pretty healthy both in terms of the value of outsourcing contracts being awarded as well as – probably more materially – just the absolute numbers of contracts: 170, which by historical standards is high.
The biggest dips are being seen in the IT world – but, again, this is very much associated with the US. For me, perhaps some of the other interesting parts – if we strip it down a little more specifically to Europe – there is still a reasonably good flow of larger transactions: on both the megadeals and the big relationship side, as well as a good flow of new scope awards . So whereas last year was very much dominated by restructurings, we might now have rebalanced to something that you would view as being more normal. So it’s a mixed picture, a bit of a curate’s egg: I think if we look out through the remainder of the year then we’d be pretty confident that globally overall things will certainly look OK compared to the historic trend.
O: How long-term do you think this trend of more, smaller deals is going to be? Is it something that is very climate-specific or is that objectively the norm now?
DA: I think we’ve been commenting on about this for a long time, and there has been a progressive shift in average TCVs towards more smaller contracts; again the multi-sourcing strategy does seem to be the de facto standard today – but as well you’ve got a number of other issues at play. Certainly when one looks at a TCV level contract duration is material, and contract lengths have been progressively shortening from an average of about seven to an average of about five years, which is quite a reasonable chunk of TCV to come out.
Typically, contract length is as much a reflection of either the level of liability transferred or the level of investment required, and progressively we’re seeing less in terms of asset transfer and less in terms of people transfer, as well as an appetite for organisations to keep themselves as flexible as possible and limit the amount of long-term commitment made.
We’ve also had the development of a supply side that is far more segmented, far more stratified than it was five or ten years ago. If you look at the volume of players in the outsource market today, the specialisation, there is a valid set of best-of-breed choices out there that perhaps there wasn’t as you came into the Noughties. My own sense is that you will probably see a bit more discipline around multisourcing – so, yes, clients will still look to leverage a number of best-of-breed relationships but probably moving to fewer strategic partners. I think there has been a proliferation over the last three or four years where companies have found themselves with a very significant number of vendors, and there is now a desire to rationalise this, and to ease some of those management and integration issues that are attached to multisource. I don’t see a wholesale return to the big full-scope long-term contracts that perhaps we would have seen with in the late ‘90s and early Noughties.
O: Getting back to what you’ve said about a declining focus on people transfer: how much of that do you think is to do with the fact that you’ve got significant growth in markets which have been very resistant traditionally to the idea of people transfer? Do you think there’s a connection?
DA: Well actually I think, less so… In a number of territories – particularly in the continental European territories that are starting to adopt the model more broadly – issues like staff transfer will still be material as a part of those exercises; it’s often more of a reflection of how mature the market is, where organisations are now second-, third- or fourth-generation outsourcers. Such companies are increasing looking towards managed service solutions as opposed to traditional outsourcing propositions. I think also particularly in some areas like the application space, the heavier use of offshoring means you are very unlikely to transfer all of the staff; frankly you’re going to move people from one continent to another.
O: OK, so moving onto a technical question relating to the structure of the index: How does the proliferation of the cloud model affect metrics regarding TCV? Obviously if it’s a pay-as-you-go model, the contract might not exist in its current form…
DA: Obviously the whole issue of what cloud is, what it becomes, how it impacts, is a little bit of a ‘black box’ in terms of its materiality to the overall outsourcing market. I think, in terms of near-term significance, that much of the impact will be felt in terms of, commercially, how contracts are structured. Clients want things that appear cloud-like in terms of the commercial dynamics although they still may well be buying services underpinned by more traditional delivery constructs. I think we’re a way off going completely to the cloud; there’s still a long way to go to address many of issues – particularly those surrounding security and resilience – and challenges, when we get to look at the scale use of those models in terms of integration with the existing platforms that large enterprises have. Yes, as we look out five years from now it might be a very different picture; I think certainly for the medium term where we’re tracking and measuring will still be valid in terms of reflecting the majority of the outsourcing market.
O: And a last question on the UK public sector specifically: obviously you have noted the almost panic-stations requirement to get things done quite quickly – and you equally obviously haven’t used that phrase… Do you think there’s likely to be any breathing space to develop larger-scale initiatives or are we still going to be looking over the next few quarters as a bit of a hasty patch-and-mend job?
DA: If you look at the data as presented, clearly it would point to a slowdown in the outsource market in the public sector. There are a couple of issues within this; as you would recognise, it does take a period of time to launch and execute a large outsourcing initiative – whether public or private sector. Given that we only had a change of government towards the middle of last year, it’s probably unrealistic to expect too much of any scale to come to contract award in 2011. As we get into 2012 and 2013, however, I would expect more large-scale public contracts to be signed. Furthermore, I wouldn’t at all be surprised if we saw different types of models being pursued, not just the traditional types of outsourcing, but also various forms of joint venture and service divestiture.