2010: an eventful year for outsourcing
Summer is drawing to an end and although most tend to believe that summer is a quiet time, a great many events have already unfolded this year, all of which mean that the market continues to be impacted by the global economic crisis.
According to TPI’s latest industry index, in the first half of 2010 the global market total contract value (TCV) of $38.9bn remained flat, compared with a year ago, following the unprecedented surge in contract restructurings during the first quarter. In the second quarter, restructurings accounted for 20% of TCV, in line with historical standards, with the greatest growth in contracts valued at between $10-25m.
Based on total contract value (TCV), Q2 2009 was down 13.5% quarter-on-quarter but it did show a 20% (quarter-on-quarter) improvement in terms of volume. However, quarterly data is prone to significant fluctuations. Indeed, looking at results for H1 2010 we can appreciate that despite sluggishness, clients are continuing to look to outsource to improve operations and enable innovations such as cloud computing.
If we focus on Europe, the Middle East and Africa (EMEA), quarterly TCV fell both sequentially and year-on-year, 21% and 14%, respectively. The commercial outsourcing market in EMEA has yet to exhibit signs of recovery following the sharp downturn in demand in mid-2008, according to TPI’s figures.
In the first half of 2010, the Nordics accounted for almost 17% of global TCV, making it the second-largest outsourcing market in the world behind the US. The impact of the decline in these traditionally strong markets was offset somewhat by a number of large contract signings in the Nordic region and France.
Reduced outsourcing activity in the UK and Germany in the first half of 2010 has caused an overall decline from the same period last year.
“So far this year the Nordics ranked as the second largest outsourcing market in the world – mostly owed to a few significant restructuring deals,” noted Duncan Aitchison, partner and president of TPI, EMEA. “Germany dipped a little this year but is still reasonably strong and has the greatest potential for sustained growth. In comparison, growth in the Nordic region is likely to be less consistent.”
The UK has seen its fair share of changes during the first half of the year, starting with the election in May, which saw the formation of a coalition government. The subsequent announcement of budgetary adjustments that soon followed have reiterated the magnitude of the changes that are required, which along with significant spending cuts across all government departments include the re-shaping of the NHS model.
“The UK is without a doubt the market that has suffered the most, certainly in Europe but the case could also be made globally. For a long time the two big markets were the US and the UK, with the UK knocking a 20%+ of the global market – reaching close to 30% in 2008. We have witness it step down, halving from 2008-2009 and again from 2009 to the first half of 2010,” commented Aitchison.
But while some there are points to support the contraction of the market, it is also noteworthy to mention that between 2005 and 2009, the UK public sector accounted for 57% of all outsourcing, compared to the commercial sector’s 43% share.
However, in H1 2010, there was a notable shift as the commercial sector share fell to just 25% of the UK market. With a 75% share of UK outsourcing spending and an increased appetite to explore outsourcing options, the public sector has become an increasingly important target for service providers to help balance the reduced opportunities in the commercial sector.
Albeit not at quite the same level, this has been true to varying degrees across the region. Indeed, the increased profile of the public sector and its importance for the EMEA region has seen the likes of TPI include it in its latest index. Figures show that public sector contracts awarded across EMEA in the first half of 2010 stood at over €9bn, with the UK Public Sector accounting for 86% of EMEA public sector expenditure.
Nevertheless, we are reminded to remain prudent and cautious in anticipating any dramatic changes in deal volume. Aitchinson admits that activity is not likely to increase significantly, as few contracts have been launched. “So far this year there has been little to no news of contracts in the works. The first six months were dominated by talk about the election, and now the coalition government is setting up the agenda.”
As the leaves begin to turn with the first autumnal breezes, speculation on what the financial crisis has in store and how outsourcing will suffer/benefit remain the order of day.
