Outsourcing contracts slow in 2007

A 25 percent drop in new contracts and a 17 percent decline in restructured contracts indicated 2007 could be a slow year for global outsourcing companies.

Researchers at TPI recently released its TPI Index analysis of the global outsourcing market for the second quarter, and the found that deals have dropped considerably when compared to the same time last year. To start, one-quarter fewer deals have been signed midway through the year than in 2006, and the average total contract value (TCV) of deals so far in 2007 is about 34 percent less than deals in the same time last year.

TPI reports the average TCV, about US$33 million, is the smallest first-half award values since 2001. Another metric, the annualized contract value (ACV), is down 30 percent from last year's figures as well, at US$5.5 billion. Existing deals also saw a downturn. According to TPI, restructured contracts -- defined as "renewals, renegotiations and related changes to prior contracts" -- accounted for 26 percent of all sourcing agreements last year, but so far in 2007 contract restructurings represent only 17 percent of the larger market.

"The Index shows that the pace of contract restructurings slowed considerably in the first half of this year. That development, in turn, pulled down the overall market value of sourcing transactions, especially in the Americas," a TPI press release says.

Not only are fewer deals being signed, the value of the deals is dropping as well, TPI reports. The TCV of new deals -- 56 contracts in the Americas, down from 86 in the first half of 2006 -- is US$10 billion, significantly less than last year's US$24 billion and the lowest first-half TCV value since 1995, the advisory firm says.

The drop in deals could indicate outsourcing vendors are facing some stiff competition from offshoring options, TPI says.

"Offshoring appears to be competing with outsourcing, with clients electing more frequently to adopt offshoring strategies rather than outsourcing," said Peter Allen, partner and managing director of Market Development at TPI, in a press release. "This is placing pressure on outsourcing providers to take it to the next level and look beyond just providing cost savings, a front on which they struggle to compete, to give clients more of what they are looking for -- value-added solutions and innovations such as specialized skills and process expertise."

Despite the slow first half, TPI says it expects outsourcing will grow about 5 percent this year, attributed mostly to new scope and the lack of large-scale contract terminations. For instance, one bright spot for outsourcers this year came in the form of new contracts.

According to TPI, the average contract value for these new deals rose 20 percent, while the level of new scope contracts remained flat with last year. Overall, the first half saw US$28 billion in new scope transaction, "which are important bellwethers of where the outsourcing industry is headed," TPI reports.

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