Outsourcing 2014: The New Normal

By Guest Author  |  Posted 02-06-2014 Print Email

Changes in marketplace maturity and demands show an increase in outsourcing activity, with shorter-term and lower-value contracts gaining popularity.

outsourcing, money, IT

By John Keppel

The global outsourcing market is increasingly characterized by growing volumes of contracting activity, coupled with a sharp decline in total contract value.

This was a key finding that emerged from the Q413 ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more. The Q413 ISG Index showed the number of contracts awarded during the fourth quarter of 2013 climbed by 13 percent, while the ACV dropped 12 percent, to $4.6 billion. For the entire year, the number of awards edged up 2 percent, while values fell 18 percent, to $18.7 billion.

The key takeaway: it’s becoming increasingly clear that, rather than being a short-term anomaly, this shift to higher deal volumes and lower contract values represents a fundamental change in the sourcing marketplace and a post-recessionary new state of affairs.

What’s driving these changes? Factors include fewer "mega-relationships" (those with an ACV of $100 million or more), as well as declines in the manufacturing and financial services sectors, weaknesses in business process outsourcing, and a trend to smaller deal sizes, as more enterprises converted long-term deals with a single supplier into shorter-term contracts with multiple providers.

The higher volumes of smaller, shorter deals also reflect market maturity and the growth of multisourcing as clients become increasingly comfortable with engaging best-of-breed suppliers and managing multiple vendor relationships. We also recognize that, while the potential benefits are significant, multisourcing also poses some challenges, such as how to ensure collaboration among a disparate team of providers.

In this post-recessionary period, we’re also starting to observe shifts in the demand for sourcing. Rather than used solely as a tool for exploiting rapid cost-savings potential, sourcing is increasingly applied for strategic advantages as enterprises begin to move to growth modes.

Another emerging sea change is that profit margins, rather than revenues, are becoming the new benchmark for service provider success. As we’ve discussed elsewhere, this trend reflects increased market maturity, client and provider collaboration, and acceptance of standard service delivery and automation-driven solutions. Providers that embrace these developments and work with their clients to continually drive down operating costs will emerge as the winners.

Against this backdrop, we expect positive results across the broader market for the first half of 2014, based on a strong industry pipeline and a softer comparison with a weak first half of 2013. Specifically, we’re forecasting growth in ACV of between 3 and 5 percent for the first six months of this year.

In retrospective, 2013 represents an inflection point for the sourcing industry. Going forward, a number of significant forces will combine to shape sourcing in the post-recessionary world, among them the challenge of maturity and saturation in the large traditional markets and industries, a lack of penetration into the emerging markets for a number of major global players, ever-increasing competition, and a decline in the cost of sourcing. And we will see a continued shift from West to East, plus further growth in under-penetrated industries, market segments and geographies.

As we come to grips with the new normal of today’s marketplace, it's important to not be complacent. With rapidly changing competitive dynamics, and with the increasing intrusion of automation and the disruptive social, mobile, data analytics and cloud technologies, things are unlikely to stay normal for very long.

About the Author

John Keppel is partner and president of Information Services Group (ISG). This is his first article for CIO Insight.



 

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