Outsourcing Market Declines on Restructuring

A new study out this week showed that the global outsourcing market declined significantly over the last year due to companies spending less money renewing deals with their existing outsourcing vendors.

Released by TPI, an Information Services Group company, the first quarter 2011 Global TPI Index showed that the total contract value of commercial outsourcing contracts equaling $25 million or more added up to $17.5 billion during first quarter of 2011. That’s a 28 percent decline over numbers reported in the first quarter of 2010 and 25 percent less than the total contract value recorded in fourth quarter 2010.

Meanwhile, outsourcing reported by companies in the Americas dropped by a precipitous 56 percent year-over-year, though it did pick up some pace in the last  quarter, gaining close to 17 percent.

According to TPI, the overall drop in outsourcing is largely attributable to what the company calls restructurings, or contracts that are renewed, renegotiated or restructured. These restructurings saw a drastic reduction of 64 percent year-over-year.

"In recent quarters, unprecedented shares of global TCV involved restructurings,” said John Keppel, president of information services for TPI. “That trend reversed itself in the first quarter, as we forecasted it would, but new scope values were right in line with previous periods.”

TPI found that new outsourcing contracts equaled $14.9 billion last quarter, a number that was unchanged year-over-year and dipped only by about 7 percent from fourth quarter of 2010.

The shifts found by this most recent TPI report point to a potential seachange in the way that companies are outsourcing. The report showed that by type of contract, IT outsourcing values suffered the most in the last year, largely attributable to the reduction in restructurings. TPI found that IT outsourcing contracts dropped by 46 percent from fourth quarter of 2011. Some of that ground, however, is being made up by business process outsourcing.

TPI said business process outsourcing had its second-best quarterly performance in the last two years and increased by 66 percent year-over-year. The firm believes that this strength will help pull out a more substantial total contract value in the coming quarters this year.

“The outlook for the rest of 2011 suggests an industry upswing based on healthy contracting activity and a modest amount of restructuring in the mix,” Keppel said. “Overall, we are cautiously optimistic about next quarter and more bullish about the second half of 2011.”