The value and volume of outsourcing contracts worldwide grew by double digits in the first quarter, fueled by a surge in smaller deals and a record number of contract restructurings, according to data released today by Information Services Group (ISG) (NASDAQ: ), a leading technology insights, market intelligence and advisory services company.
Data from the ISG Outsourcing Index®, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show that first-quarter ACV rose 20 percent, to $6.1 billion. The total annual value of smaller deals, those worth $40 million or less, surged 40 percent, to $4.1 billion, while the value of restructured contracts soared 48 percent, to $2.8 billion.
The global market saw volume exceed 400 contracts for only the second time ever in a quarter, with the total number of deals — 404 — surpassed only by the record volume of 446 set in the second quarter last year. Overall, volume was up 32 percent versus the prior year, fueled by growth in restructurings, up 78 percent, to a record 173 contracts, and information technology outsourcing (ITO), up 51 percent, to 301 contracts. Meanwhile, the number of mega relationships, those worth $100 million or more, totaled only 5 for the quarter, down from 7 in the prior year.
For the trailing 12 months, ACV totaled $24.7 billion, the highest level in the last four years, while volume reached a record 1,542 contracts, both pointing to overall market health.
“As forecast by ISG, 2016 has gotten off to much stronger start than last year, with ACV exceeding $6 billion for the second consecutive quarter, a sign of healthy market flow,” said John Keppel, partner and president of ISG. “There’s a good balance between the number of new scope and restructured contracts, indicating plenty of new business is coming to market. The strong growth in ITO value and volume shows that technology solutions are having a positive impact in many areas, even as work increasingly is moved to the cloud.”
The total value of ITO contracts in the first quarter rose 24 percent, to $4.2 billion, while the value of business process outsourcing (BPO) deals grew 12 percent, to $1.9 billion, despite a slight decline in the number of BPO contracts.
The Americas maintained its momentum, posting its ninth consecutive quarter of ACV above $2 billion. ACV of $2.8 billion was up 30 percent over last year’s first quarter, and contract counts soared 49 percent, to 217 deals, the second-highest quarterly volume ever.
Restructuring activity reached a record 102 contracts, while the value of such deals, $1.4 billion, was the second-highest ever, surpassing the value of new scope awards, a regional rarity. ITO value surged 76 percent, to $2.1 billion, while BPO value declined 29 percent to its lowest level since the fourth quarter of 2013.
Among industries, financial services turned in its best quarter in more than a decade, with value and volume up 80 percent and 50 percent, respectively. Healthcare and pharmaceuticals notched one of its best first quarters ever, fueled by structural changes in the U.S. healthcare industry, while two smaller sourcing industries, consumer packaged goods and retail, recorded strong ACV gains.
Europe, Middle East and Africa (EMEA)
EMEA posted ACV of $2.8 billion, up 19 percent from the prior year, while contract counts, at 160, were up 28 percent. Restructuring activity drove the market, with ACV up 115 percent and volume up 91 percent, the most active quarter in the last two years. Meanwhile, new scope value slumped 13 percent, to $1.5 billion, its lowest level since the third quarter of 2014. Both ITO and BPO registered gains, with ITO driven by applications design and maintenance work, and BPO by facilities management, contact center, finance and accounting, and multi-function work. With ACV up 41 percent, BPO had its best first quarter since 2012.
By geography, the UK saw a modest increase in ACV, while the region’s other major market, Germany, Austria and Switzerland (DACH), saw its ACV decline despite an increase in contracting activity. Among smaller markets, the Nordics had strong ACV growth, fueled by a large deal between Volvo and HCL and stepped-up contracting activity, and southern Europe grew by a triple-digit percentage off a small base, while Benelux dropped sharply.
Among industries, manufacturing and telecom turned in strong quarters, fueled by increased deal activity, with telecom benefiting especially from a large finance and accounting deal between Telefonica and IBM. Financial services ACV, meanwhile, was off 30 percent from a strong 2015 first quarter, but volume increased, with the HSBC-Jones Lang Lasalle facilities management transaction and the Accenture-RSA Insurance BPO deal being noteworthy.
Asia Pacific continued its marketplace roller-coaster ride, as first-quarter ACV dropped 13 percent versus a year ago, despite the signing of a mega deal in Australia, and contract count dropped sharply, down 23 percent, to its lowest level since the fourth quarter of 2011. Both new scope and restructuring values edged down slightly, but ITO value plunged more than 50 percent, recording its worst first-quarter performance in nearly a decade. BPO, on the other hand, logged its best ACV quarter since the third quarter of 2012, but the boost came from a large, 10-year contract in Australia between Rio Tinto and Sodexho for facilities management.
Among subregions, Australia-New Zealand, fueled in large part by the Rio Tinto mega-deal, recorded triple-digit growth in both value and volume over a weak prior-year quarter. India, meanwhile, had its weakest ACV showing in almost 10 years, but Southeast Asia recorded triple-digit ACV growth on the back of the five-year IBM-Indosat Ooredoo deal. Manufacturing was the only gainer among the region’s major industries, while financial services and telecom slumped significantly over last year’s first quarter.
Outsourcing in the public sector, previously on par with the commercial sector, now far exceeds that market, according to an ISG special-topic analysis presented this quarter. Over the last five years, the annual contract value of sourcing in the public sector has more than doubled, and now accounts for two-thirds of total outsourcing ACV, or $65.6 billion. While contracting activity in the commercial sector has grown by about 20 percent in that span, public sector activity has remained flat. The public sector is still dominated by large deals averaging more than $40 million in ACV, versus an average ACV of $16 million in the commercial space.
North America, led by spending from the U.S. Departments of Defense, Homeland Security and Health and Human Services, remains the world’s largest public-sector market, followed by the UK, Europe and Australia.
“Looking forward, we expect a more difficult year-over-year comparison in the second quarter of 2016,” said Keppel. “For sustained market growth, the industry will need to continue seeing stepped-up activity in the smaller deal category.
“Longer term, ACV levels should remain in positive territory for the year due to the market’s fast start in 2016. We see pockets of increasing long-term demand across several secondary markets in parts of Europe and Asia Pacific, and consistent demand in both the U.S. and UK.”