Enterprises are finding their business feet after being in freefall with the downturn and are now shifting more of their work to outsourcers to cut costs and streamline operations both short-and long-term. Yet the functions being outsourced are very specific, with more IT, telecom, manufacturing and media and less business process, financial services and HR.

 

The overall trend has led to a steady recovery in the outsourcing industry reports the 4Q09 Global TPI Index, which has showed its best quarterly results in 18 months.  Total contract value is up 47 percent sequentially to $24.7 billion, highest since 2Q08 and eight percent year-over-year and the best quarterly performance since the second quarter of 2008.

 

Full-year 2009 results could not overcome the market’s weak showing during first two quarters. TCV for the year declined 13 percent to $74.5 billion, its lowest point since 2001. However, as 2010 begins, industry pipelines are healthier and more stable than a year ago says TPI. The TPI Index measures commercial outsourcing contracts valued at greater than $25 million. Here is a synopsis of key trends:

 

 

 

 

Manufacturing, where softening consumer demand is necessitating investments in reducing operational costs, TCV rose 76 percent over the first two quarters of the year. In financial services, TCV was up 33 percent in the second half. And in Telecom & Media, a mature vertical that is nonetheless seeing contract renewals and renegotiations, TCV was up 24 percent. These three verticals will need to continue their positive momentum if the broader market is to maintain its gradual recovery

 

 

The news is not all positive in outsourcing. The BPO market continued to struggle in the fourth quarter. While TCV in this segment increased almost 29 percent sequentially, a third consecutive quarterly improvement, it remained 33 percent below the same period in 2008. For 2009, BPO TCV declined 38 percent to $18.5 billion, its lowest level since 2001, and the Finance & Accounting, Financial Services Operations and Human Resources Outsourcing categories remained stalled at a fraction of totals reached in prior years.

 

The Global TPI Index showed vastly different results among the three major geographic regions of the world. In the Americas, TCV rose just over 4 percent over the prior quarter but remained off by 17 percent year-over-year. Despite growth in Latin America, full-year TCV in the region declined 6 percent to $27 billion, the lowest level of the decade. The service provider landscape continued to shift in the region due to significant consolidation and gains by India-heritage firms, which now make up nearly one-third of the top players.

 

In EMEA (Europe, Middle East, Africa), several large transactions boosted fourth-quarter TCV 135 percent sequentially and 60 percent year-over-year to $15.4 billion, its best performance since the second quarter of 2008. However, full-year TCV in the region fell 21 percent to $36.7 billion despite only a slight decline in the number of contracts, an indication that EMEA is experiencing the same shrinking transaction sizes that have slowed growth in the United States.

 

Asia Pacific fourth-quarter TCV fell 37 percent sequentially and 56 percent year-over-year to $2.1 billion. But for the year, the region’s $10.5 billion in TCV represented stabilization with 2008 after several volatile years. While China and India have yet to reach their full potential as outsourcing markets, Australia continued its solid track record of late, doubling its share of the region’s TCV.

 

 “As we anticipated, 2009 marked a low point in outsourcing because of the recession in the general economy and its impact on commercial buyers,” said Mark Mayo, Partner and President, Global Operations, TPI. “The global market bottomed in the first half of the year and turned in the second half. It now shows signs of recovering slowly and steadily, rather than bouncing back to pre-recession levels, but the outlook for building on its second-half momentum is positive.

 

“As businesses becoming more confident in making strategic decisions, we are seeing promising signs for the global outsourcing market. All in all, we sense that the worst is behind us and expect a return to growth in 2010.”