The state of IT outsourcing in 2013 and beyond

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It's that time of year again. A time to reflect and predict. I am always looking for guest blog posts for this blog so if you have any predictions for IT outsourcing next year, send them to me at kflinders@techtarget.com.
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Here is a guest blog from ISG's head in Northern Europe, John Keppel. He writes this overview of the 2013 outsourcing market and contract activity, and shared his predictions for 2014.

IT outsourcing Review of 2013 and 2014 Outlook

By John Keppel, partner and president, ISG North Europe

"Following a fairly solid 2012 performance, the European outsourcing market spent much of 2013 in a state of flux. The first half of the year experienced relatively low levels of activity, but as confidence began to rise, more deals were awarded, resulting in an outstanding performance in the most recent third quarter.
 
Sourcing trends
One of the most interesting trends of this year has been the rise in small outsourcing deals, which are having an increasingly substantial effect on the market.
These smaller deals consistently accounted for more than half of the total ACV signed in each quarter through 2013. To illustrate, in the third quarter, deals in our lower band accounted for €2.6 billion of the $4.6 billion total ACV awarded.
 
The 323 deals in the under €40 million category awarded in the third quarter marked an increase in volume of one-third year-on-year.

Big deals still matter though, with the third quarter seeing 10 mega-relationships awarded globally. Since 2010, only three other quarters have exceeded that 10 mega-relationship mark. As a business we have noticed more and more mega-relationships are due to restructurings, and of the 10 we saw this quarter, nine were restructuring. That represents a high we've never seen before. Fifteen of the 23 mega-relationships awarded so far this year, a full 65%, are restructurings, compared to about 40% to 45% in prior years.
 
ITO
The third quarter of 2013 saw a marked increase in the number of IT Outsourcing (ITO) contracts awarded in EMEA, reaching a record breaking 125 counts - the highest figure ever recorded by the Index and almost double the number awarded in the second quarter.
 
As a result, ACV also increased significantly - the €2.3 billion awarded was the second highest ITO ACV to be recorded in a quarter, and was up 177% over the relatively weak quarter that preceded it.
 
BPO
Business Process Outsourcing (BPO) activity remained robust in 2013, although the absence of larger deals took its toll on overall ACV. However, contract counts continued to rise in EMEA throughout the year, reaching an impressive 51 contracts in the third quarter - the highest figure ever recorded.
 
Whereas ITO has been the mainstay of organisations looking to cut costs in a challenging business climate, EMEA companies are now looking beyond it to BPO value propositions, which can deliver a more profound business change. In 2014 we expect much of the same, with BPO activity likely to continue to rise.
 
Public Sector
The Public Sector has recognised that best-of-breed providers offer specialist knowledge that can derive real value from outsourced services, value that wasn't possible with the single-provider mega-deals of the past. We're seeing real innovation in the Public Sector, and this vitality makes the public sector an exciting space to be involved in.
 
The U.K. has led the way in using outsourcing as one response to austerity measures. Yet while overall activity remains low, many European public sector organisations are starting to explore the use of outsourcing in their wider sourcing strategies and activity in some markets is slowly picking up.
 
With these programs continuing to be implemented across EMEA, the evaluation of innovative sourcing methods to achieve cost optimisation and reduce waste is likely to increase. Governments are increasingly turning to outsourcing because, despite pressure to control spending, they can't simply put infrastructure investments aside. Public sector outsourcing can help satisfy taxpayer demands for efficient, localised modern services without increasing costly bureaucracy, and this looks set to continue.
 
The forward view
Looking ahead, we expect our fourth quarter results to reveal that 2013 will finish strongly but will perhaps fall short in the region of 12- 15% compared to the full year 2012, due to the protracted global weakness of the first half remaining a drag on annual contracting values.
 
Turning to 2014, we see strong public and private sector activity in the pipeline, and with the majority of organisations having an increased focus on efficiency, strong governance and value for money in their outsourced functions, we expect the trends of multi-sourcing and the SIAM (Service Integration and Management) model to accelerate in the coming months."
 

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This page contains a single entry by Karl Flinders published on December 5, 2013 8:47 AM.

Mindtree appoints local to head up UK and Europe as Indian business model changes was the previous entry in this blog.

Who said IT service providers don't innovate? TCS is grabbing start-ups before they even start-up. is the next entry in this blog.

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