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Outsourcing Market Slow To Shine, With Brightness From Cloud Computing: TPI Report

By Brendan B. Read
Senior Contributing Editor

When financial circumstances are challenging organizations often turn to outsourcing to offload direct personnel, facilities and IT costs. So one would think outsourcers do well in difficult times, like today. Yet if overall demand is low, so will be the volume and value of projects and programs outsourced, and vice-versa.

TPI has just released data showing just that. The 2Q10 Global TPI Index, which measures commercial outsourcing contracts valued at $25 million or more, recorded total contract value (TCV) of $18.1 billion in the second quarter of 2010, down about 13 percent both sequentially and year-over-year. The market in the second quarter exhibited particular softness in Europe, the Middle East and Africa (EMEA), Asia Pacific and IT outsourcing (ITO).

For the first half of 2010, global market TCV of $38.9 billion remained flat with a year ago following the unprecedented surge in contract restructurings during the first quarter. In the second quarter, restructurings accounted for 20 percent of TCV, in line with historical trends. 

The one strong point has been the Americas: U.S. especially. TCV was up nearly 30 percent. In contrast EMEA was down 6 percent in the first half and Asia Pacific 59 percent.

“The global outsourcing market is not yet bouncing back as economic uncertainty continues to weigh on corporations around the world,” says TPI.

If the outsourcing market is cloudy, a movement by organizations worldwide to move computing from purchased premises software licenses to the cloud may be a bright spot going forward. Third-party-provided cloud/hosted/SaaS (News - Alert) solutions are becoming more widespread, practical and popular as issues such as security, scalability and customization are addressed by suppliers.

TPI Research reports that 78 percent of the firm’s clients have had internal discussions about cloud computing.

Other sources indicate that Canada, whose economy has weathered the downturn better than the U.S. may be increasing its outsourcing, especially out of country. Peter Ryan, Lead Analyst, Ovum (News - Alert) was reported in the June issue of Customer Interaction Solutions pointing out that Canadian businesses are nearshoring and offshoring contact center work with English-language calls handled in India, the Philippines and South Africa and French-language interactions managed in countries such as Egypt, Mauritius, Morocco, Rwanda, Senegal and Tunisia.

“The global outsourcing market continued to recover slowly and quite unevenly in the second quarter,” said Mark Mayo, Partner and President, TPI Global Operations. “At the same time, we see corporations continuing to look to outsourcing to improve their critical business operations and enable important innovations such as cloud computing.”

In keeping with the uneven recovery, the 2Q10 Global TPI Index found significant variation across the market.

By region, the Americas saw second-quarter TCV decline 9 percent over the first quarter of 2010 but increase 21 percent over the second quarter of 2009. In EMEA, however, quarterly TCV fell both sequentially and year-over-year, 21 percent and 14 percent, respectively. In Asia Pacific, TCV increased 5 percent sequentially in the second quarter but dropped 73 percent year-over-year.

By scope, ITO TCV during the second quarter fell nearly 30 percent sequentially and 23 percent year-over-year. First-half ITO TCV of $29 billion, fueled by the large contract restructurings of the first quarter more than by second-quarter performance, rose 5 percent over the year before.

The quarterly TCV of contracts for business process outsourcing (BPO) rose 60 percent over the first quarter of 2010, which was one of the worst on record in this segment, and 20 percent over the second quarter of 2009. But overall BPO activity remained weak by historical standards, with the greatest growth in contracts valued at between $10 million and $25 million.

By industry, the Global TPI Index found declining activity in financial services, manufacturing and telecom and media, even in the more robust Americas region. These three sectors are as critical as ever to the outsourcing market, says TPI “and their relative sluggishness restrained overall market growth in both the second quarter and the first half of the year.”

In contrast, the travel, transportation and hospitality industry saw impressive gains for the second straight quarter, and the retail sector, with four successive halves of growth off a small base, remained another industry to watch, as retailers continue to experience top-line revenue pressure and pursue cost reductions from sourcing.

“Our outlook for the remainder of the year remains cautious,” Mayo said. “We know that third quarters are historically weak and we believe the upcoming third quarter will follow that pattern. The market should continue the slow and uneven recovery it began last year.”