Outsourcers warned of hard times ahead

Outsourcing providers will face increasing challenges in 2007 as the market gets tougher and more competitive, new research has predicted.

The latest Quarterly Index from outsourcing advisory firm TPI said that the final quarter of 2006 was the worst fourth quarter in five years in terms of the value of outsourcing contracts awarded.

In addition, the company estimates that the value of contracts entirely new to the market (this excludes re-tenderings of existing contracts) declined by eight percent on 2005 levels.

The trend towards shorter and smaller contracts, and more specialist and single-process deals, means that tendering activity nevertheless remains frenzied.

A record 350 contracts were agreed in 2006, just beating last year's previous record of 341.

Duncan Aitchison, managing director of TPI EMEA and Asia-Pacific, said: "In practice, the trend towards shorter contract duration means that outsourcing providers are obliged to compete more often in order to secure the same level of business.

"For many the cost of sale can become a major issue. Consequently service providers need to be increasingly selective in terms of the contracts they pursue."

Aitchison added that, at the same time, competition has been heightened with more providers competing for market share. The number of providers winning contracts has increased by 64 percent in the past four years, from 55 in 2002 to 90 in 2006.

The so-called 'Big Six' outsourcing companies (Accenture, ACS, CSC, EDS, HP and IBM) are winning a decreasing proportion of those deals valued at over US$50m, according to TPI.

Their share of the market globally by total contract value has fallen from 71 percent in 2002 to 46 percent in 2006.

"In general terms, this increased competition is clearly good for buyers," explained Aitchison.

"However, greater diversity and specialisation among suppliers, combined with more frequent tendering, means more complexity in the procurement process and the management of outsourcing contracts."

Those service providers based in India, such as Wipro, Tata and Infosys, are reaping the benefits of the trend towards single-process and specialist deals.

These providers, alongside the 'Big Five' in Europe as well as other smaller and niche providers, are encroaching on the Big Six's market share, TPI stated.

The India-based providers have been particularly successful in the applications development and maintenance (ADM) sector, having grown their market share from eight percent in 2003 to 36 percent in 2006.

In contrast, the Big Six have seen a decline from 76 percent of the ADM market in 2003 to just 38 percent in 2006.

"The figures clearly show a maturing of the India-based service providers, as they challenge the established players by taking an incremental approach and signing a large number of small specialist contracts," said Aitchison.

"In the ADM space, for example, although they have not yet surpassed the Big Six, the difference between the market shares of these groups is now marginal.

"India-based providers are clearly considered an attractive and credible alternative to traditional players and over the next few years we expect to see them competing directly with the Big Six for larger value contracts."

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