Offshore Outsourcing Set for Further Growth, Says TPI

The latest TPI Quarterly Index shows a record level of outsourcing deals in negotiation as of early July involves offshoring.  TPI also reports that Indian service providers are winning bigger deals, and finds strong demand for outsourcing in the UK despite a temporary dip in demand across Europe. Free research excerpt.

TPI says little information is available on the breakdown of outsourcing between onshore and offshore operations.  However, their analysis of deals on which they are currently advising (which TPI says represents approximately one quarter of the commercial outsourcing market, and provides a six to nine month indicator of where the market is heading) reveals that 47% involve offshoring or 'global service delivery'.  This compares with 28% at this point last year and represents a record high.  Furthermore, where outsourcing contracts contain an offshore element, a far greater proportion of the work is moving offshore, averaging almost half (48%) of the contract value, up from 27% a year ago.

Indian service providers winning bigger deals

This growth in offshore outsourcing is further evidenced by impressive gains for the Indian service providers, whose market share has risen to 5.2% of the total value of contracts signed so far this year, up from less than 3% in 2005 and just over 1% in 2004.  Moreover, data relating to deals currently under negotiation (with which TPI is involved) points to a dramatic, almost threefold (284%) increase in the value of deals for which the Indian providers are competing, compared with three months ago.

The size of deals the Indian service providers are winning is also increasing, up by 25% from an average deal size of Euro 101 million in 2005 to Euro 126 million in 2006 to date.  Of 11 contracts totalling Euro 1.38 billion awarded to Indian providers this year, 9 are in Indians' traditional areas of strength in applications development and maintenance (ADM) or finance and accounting (F&A).  However, data on the transactions on which TPI is currently advising reveals that the Indian providers are now being considered for remote IT infrastructure work as well.  'The mature Indian vendors have achieved significant growth.  Infosys, Satyam, Wipro, TCS, and HCL are beginning to win larger and more varied deals.  Our data suggests that there is no reason to doubt that this trend will continue, especially as buyers gain experience of working with them, and their confidence grows as a result,' said Aitchison.

However, the Big Six of outsourcing -- Accenture, ACS, CSC, EDS, HP and IBM -- still dominate the offshore outsourcing market having won almost three quarters (73%) of contracts in 2006 to date compared with 18% for the Indian providers.

Strong demand in UK, dip in Europe

UK companies have signed outsourcing contracts totalling over Euro 5.2 billion so far this year, up 9% from Euro 4.8 billion this time last year.  The continued strength of the UK market contrasts with the rest of Europe, where demand for outsourcing has dipped.  The total value of contracts signed in Continental Europe so far this year (Euro 4.8 billion) is some 30% lower than the equivalent figure at the same time last year.

Taking a global view, the UK accounts for 17.2% of the value of contracts signed this year, Germany 6.6 per cent and the Netherlands 2.6 per cent, with no other country in Europe representing over 2% of the global market.  'The likelihood is that the falling off of outsourcing in Continental Europe is nothing more than a temporary blip.  Nevertheless, the UK is likely to remain the most significant buyer of outsourcing in Europe for some time to come,' said Aitchison.

The strength of the UK market is also demonstrated by the growth in business process outsourcing (BPO) by UK companies.  The UK accounts for over a quarter (27 per cent) of the total value of business process contracts signed worldwide to date in 2006, up from 19 per cent in 2005 and 23 per cent in both 2004 and 2003.  The next largest user of BPO in Europe is Germany, representing 3.8 per cent of the value of contracts signed globally this year.

Duncan Aitchison, Managing Director, International with TPI, said, 'Contrary to speculation about rising levels of dissatisfaction with offshore outsourcing, our data predicts further growth in the value of work being moved offshore.  In our experience, the approach of many companies to outsourcing has now matured to the extent that it is now no longer a question of whether to offshore, but rather which elements and to what degree.'

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