Record number of BPO contracts awarded in Europe suggests shift in market
Figures from the latest EMEA ISG Outsourcing Index show that overall annual contract value (ACV) decreased by 23 per cent compared to the same period last year and by 16 per cent from last quarter. Yet business processes outsourcing (BPO) awards are up by 22 per cent year-over-year.
In the second quarter we saw a notably tepid performance generally in the European outsourcing market, but anticipate performance to pick up in the second half of the year.
ACV came in at €1.6 billion, which was disappointing, but this overall decline can be attributed to a lack of large-deal awards. There were just 11 awards over €32 million in ACV in the quarter, the weakest performance seen since the third quarter of 2010. However this decline is also a global trend; ACV decreased by 27 per cent from the previous quarter worldwide, reflecting a broadly similar sentiment across all regions.
In total, 109 contracts were awarded in Europe, which was down from the 133 of the previous quarter. Just nine of these were large-deal awards and this absence of larger awards accounted for the overall ACV decline in the region.
However there was a silver lining in the record-breaking level of BPO activity. The number of BPO contracts awarded increased sequentially and was up 22 per cent year-over-year to reach an all-time high of 45. BPO ACV in the region reached €700 million in the second quarter, up 60 per cent quarter-over-quarter though 20 per cent shy of the record set in the second quarter a year ago.
In contrast to BPO activity, the number of IT outsourcing (ITO) contract awards declined both in EMEA and globally. ITO ACV dropped by 25 per cent compared to last year and 36 per cent sequentially. ACV for the first half of the year totalled €2.3 billion, down eight per cent down from the same period in 2012. There are fewer, smaller ITO contracts being awarded overall, though it is worth noting that the influence of new models such as multisourcing and cloud are starting to nibble away at ITO contract sizes in general.
Overall the UK and DACH markets were most responsible for the downturn in contract values, with activity suppressed in these areas. Yet other sub-regions, particularly the Nordics, showed strong half-year performances. In the UK, where recovery from the recession has been uneven, €1.3 billion in ACV was awarded in the first half of the year, down 25 per cent from the same period in 2012 and more than 40 per cent from the second half of 2012.
Although the second quarter results were softer than expected, we remain optimistic for industry performance in the second half of the year; service providers’ pipelines are above the levels seen six months ago and providers are also reporting greater confidence levels. This should translate into a stronger showing in the third and fourth quarters.
Now in its 43rd consecutive quarter, the ISG Outsourcing Index (formerly the TPI Index) provides a quarterly review of the latest sourcing industry data and trends.
John Keppel is President, North Europe, at ISG.