Article

Outsourcing contracts shrink due to increased use of offshore locations

Companies are awarding smaller outsourcing contracts according to the latest Quarterly Index from TPI, the leading sourcing advisory firm. The average value of larger contracts signed worldwide to date in 2005 is €183 million, down by almost a quarter (24 per cent) from €240 million a year ago.

The trend is particularly intense in the European market, where average contract value is down 37 per cent on this point in 2004.

It also appears to be gaining momentum, with the average contract value in the last quarter only a third of the average value in the same quarter of last year.

However, the number of outsourcing contracts continues to rise, being 11 per cent higher than it was a year ago.

Duncan Aitchison, Managing Director of TPI, tells contactcentrelink.com that 'Contracts are becoming increasingly specialised with many companies choosing to outsource single functions, such as accounts payable or desktop support, selecting a best-of-breed provider for each. This trend to a larger number of smaller contracts is creating opportunities for a wider range of providers and driving increased competition to the benefit of outsourcing purchasers. Indian providers in particular are enjoying growing success. As the recent ABN Amro deal demonstrates, Indian providers can also now compete for and win the biggest application development and maintenance (ADM) contracts.'

The trend to smaller average contract values is further evidenced by only eight mega deals - contracts valued at more than €800 million - having been signed this year compared with 13 by this point in 2004. Moreover, a growing proportion of these mega deals are restructurings rather than entirely new contracts. Nearly 40 per cent of those signed so far this year were restructurings - far more than ever before.

TPI's figures also show that the use of offshore locations continues to increase. Very little information is available on the breakdown of outsourcing between onshore and offshore operations. However, an examination of deals on which TPI has advised shows that 44 per cent of contracts signed so far this year involved offshore components or 'global service delivery', up from 40 per cent in 2003 and 2004. According to TPI, more BPO than ITO deals now have offshore components - a reversal of the norm in previous years.

'With such a significant volume of outsourcing contracts nearing their renewal date, 2006 could witness interesting shifts in the market share of the Big Six and other providers. Although contract lengths are declining, success or failure could have implications for a vendor's market position for years to come,' says Aitchison.

'It seems that BPO clients are becoming increasingly comfortable with work being performed by offshore providers,' Aitchison says. 'More than ever, we are seeing clients embrace global service delivery and the question is no longer whether to offshore, but which functions are best delivered from which location.'

TPI data also reveals that a considerable number of outsourcing contracts awarded in the last seven to ten years are now nearing an end. The company estimates that 128 contracts, originally valued at over €32 billion, are coming up for renewal in 2006. More than 70 per cent of this potential contract value is under contract to CSC, EDS and IBM. Although, it is not yet certain how competitive the contract renewals will be for these incumbents, TPI experience suggests that about a quarter are competitive and that the proportion is increasing.

TPI attributes the trend towards smaller deals to three principal factors: firstly the impact of price competition, due to the increasing use of offshore resources and the associated lower labour costs; secondly, a typically lower capital component, because contracts are less likely to involve the transfer of assets to the outsourcing vendor; thirdly, a growing tendency to select more specialist providers.

This last factor is particularly significant: in the past two years 80 per cent of deals have focused on a single process or function, compared with only 65 per cent three or four years ago.

U.S. Document Outsourcing Market Forecast to Reach $38.3 Billion in 2009, Says InfoTrends/CAP Ventures
Between 2004 and 2009, the market is expected to experience a compound annual growth rate of 4.0 percent, reaching $38.3 billion by 2009. Opportunities for higher growth exist within higher value-added services concerning digital color production printing and document process outsourcing.

Outsourcing helps WHSmith save £18m.
High street retailer WHSmith says the successful outsourcing of its IT systems has helped to achieve £18m in cost savings in its latest financial year.

Government considers outsourcing Jobcentre services.
Everything except benefits, managing contracts and deciding on eligibility could be outsourced from the 650-plus Jobcentre offices as the government attempts to revamp its welfare-for-work programmes in a proposed green paper.

Aussie airline 'Qantas' mulls outsourcing 3000 jobs to Asia.
Australia-based domestic and international airline 'Qantas' is planning to offshore nearly 3000 jobs to Asia in order to bring about a change in the age-old work practices prevalent there.

Air New Zealand proposes outsourcing some engineering services.
Under the proposal Air New Zealand Engineering Services (ANZES) would outsource heavy maintenance of the airline's long haul fleet of Boeing 747s and 767s as well as the new Boeing 777s, which start arriving at the end of this month. It would also outsource maintenance of the engines that power these aircraft. This work would be outsourced to a specialist, large-scale maintenance centre in Asia or Europe.

Mercer sign £34 m IBM Outsourcing contract.
Mercer Human Resource Consulting has awarded IBM a $58m (£34m) contract to manage its IT procurement, desktop infrastructure and help desk support in the US and UK. The five-year contract will support 10,500 Mercer employees across the two countries, and includes IBM deploying its procurement software.

Gartmore outsources with JPMorgan.
Gartmore Global Investments has selected JPMorgan Managed Account Solutions, a division of JPMorgan Worldwide Securities Services, to provide account opening and closing, account maintenance, document management, order management, performance reporting and account reconciliation.

Dell Setting Up Customer Contact Center In Philippines
Dell today announced it will establish its new customer contact center in the SM Mall of Asia office complex in Pasay City, extending its Philippine presence to two locations - a recruiting and training center in Makati City, and the new facility in Pasay City. It will start recruiting in November to fill 100 positions for the contact center, which will start operations in February.

Pearl casts 950 jobs over to Tata.
Some 950 back office and IT jobs at UK insurance outfit Pearl Group are to be transferred to Tata Consultancy Services (TCS). As part of the deal, valued at £486m over the next 12 years, India-based business process outfit TCS intends to create a separate company in the UK to employ the workers.

India to be 'key player' in KPO
'India will be a key player on KPO supply side, as it is a country with a large base of highly qualified professionals,' PwC Executive Director Joydeep Datta Gupta said unveiling the report 'Global Integration through KPO'.

Metavante Corporation extends its contract to EFT and card processing with Glenview State Bank
According to the agreement, GSB has extended its contract with Kirchman Corporation, a Metavante company, for use of the Kirchman Bankway core processing solution. In addition, GSB has extended its contract to include Metavante's credit card account processing services. Earlier in the Month Metavante corporation had signed with UMB Bank to process online bill payments originated by UMB customers on its scalable payments engine. However, UMB will manage its bill pay Web site and data warehouse, where it will maintain control of user profiles and scheduled payments.

SI International gets $50M Treasury job
SI International, a US-based IT and network solution company, has won a USD 50 million contract to provide IT support to the Office of the Comptroller of the Currency (OCC), a US Department of Treasury agency.

Colt wins €15m networking deal with Commerzbank
Telecoms firm Colt has signed a €15m deal with the German Commerzbank to manage and upgrade the bank's IT infrastructure.

Steria Awarded EUR 365M British Home Office IT Svcs Deal
Steria has been awarded the Offender Management National Infrastructure (OMNI) IT services contract with the National Probation Service, which could be worth in excess of £250m over the next ten years.

TCS has acquired Sydney Financial Network Services
TCS has acquired Financial Network Services (FNS), a Sydney-based core banking solutions vendor, for $26 million (Rs 117 crore). TCS will now have its own core banking solution, like i-flex Solutions and Infosys.

Satyam closer to $1-b mark - Q2 net up 34 pc;
SATYAM Computer Services Ltd has recorded total revenues of Rs 1154.97 crore and a net profit of Rs 237.34 crore for the second quarter ended September 30, 2005.

Scicom to provide BPO services to Nokia in US
The Malaysian unit of Scicom, a BPO service provider to the telecom industry, has bagged a three year, MYR 128 million contract to provide BPO support to the North American division of Nokia.