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ISG Outsourcing Index™: 2Q, 1H Contract Volumes at Record Highs
[July 16, 2015]

ISG Outsourcing Index™: 2Q, 1H Contract Volumes at Record Highs


STAMFORD, Conn., July 16, 2015 /PRNewswire/ -- Contracting activity in the global outsourcing industry surged to all-time highs in the second quarter and first half, even as the annual value of those contracts declined, according to the latest market data from Information Services Group (ISG) (NASDAQ: III), 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 a record 451 contracts were signed in the second quarter, along with a high of 754 agreements in the first half. Despite the steep rise in activity, second-quarter ACV, at $6.2 billion, was off 7 percent from the very strong second quarter of 2014, but rose 24 percent compared with the lackluster 2015 first quarter. For the first half, ACV came in at $11.2 billion, down 14 percent from the prior year, dragged down by one of the slowest first quarters in the last decade.

The sharp increase in activity comes as buyers continue to negotiate more deals at lower value, not only to take advantage of specialized services offered by smaller, niche providers, but also to avoid being locked into large, long-term contracts at a time when a wave of new technologies and operating models is causing significant disruption and uncertainty in the services industry.

"The market continues to push into new territory with record volumes of global outsourcing adoption. In fact, three of the past four halves have logged the highest counts ever," said ISG President and Partner John Keppel. "We're seeing a clear and continuing trend toward more deals at lower value. From the start of the recession in 2008 until now, counts have nearly doubled, while ACV has risen only modestly. Technology has changed significantly during this period, which saw the beginning of the Digital As-a-Service revolution and its continuing pervasive impact on the global services market."

Added Keppel, "It's particularly noteworthy that ACV rallied from a dismal first quarter to pass the $6 billion mark without any significant aid from mega-relationships this quarter. The second quarter had only two deals with ACV greater than $100 million, a low not seen in many years. Clearly, it's the size of the demand, not the size of the deal, that is driving this market."

The value of new-scope contracts, totaling $3.8 billion, bounced back from the lackluster first quarter of 2015, but was down 11 percent against the prior year. The value of restructured contracts, at $2.4 billion, also rebounded, rising about a third over the prior quarter and pulling nearly even with the same period last year.

By domain, the value of information technology outsourcing (ITO) contracts, worth $4.8 billion on an annualized basis, was up sequentially from the slow first quarter, but fell against the strong second quarter of 2014. At $1.4 billion, business process outsourcing (BPO) value didn't quite match the prior two quarters in which ACV exceeded $1.5 billion. At the half-year mark, however, total BPO ACV rose 4 percent overthe prior year, due to stepped-up activity in industry-specific BPO and contact center work.



By region, the Americas achieved a record number of contracts this quarter and its highest quarterly ACV since the first quarter of 2012 – $2.8 billion, up 11 percent over the prior year. A model of consistency, the region has now surpassed $2 billion in ACV for six consecutive quarters. The healthy U.S. market had its best second-quarter ACV since 2010, and Canada and Brazil also contributed to the region's strong performance. Results were driven largely by ITO, which had its strongest quarterly performance in three years, surpassing $2 billion in ACV for the first time in that span. BPO, which pulled back slightly from its strong performance in the first quarter, was driven by contact center work, which accounted for about a third of ACV and deal volume. Smaller outsourcing verticals, such as Travel and Transport, Healthcare and Pharmaceutical, and Retail, led the charge as the region's top growth industries in the quarter.

EMEA, meanwhile, rebounded from a disappointing first quarter to record $2.8 billion in ACV in the second quarter and exceed the $5 billion mark at the half. The value of new scope awards more than doubled that of restructured contracts in the first half.  ITO surged 44 percent over the first quarter, but was down 9 percent versus last year. The region was led by the U.K., which saw ACV climb nearly 20 percent for the half, both on strong contracting activity and on the back of large contracts awarded by Deutsche Bank and the BBC. ACV in the DACH sub-region, likewise, benefited from large transactions, while Eastern Europe climbed both on contract counts and ACV. Among industries, Financial Services and Energy were the top performers.


Asia Pacific also rebounded, albeit slightly, from an anemic first quarter, but this year's results couldn't compare with a very strong first half last year, which was driven by a number of large awards. The ITO market this year is being driven by apps-related deals, which accounted for 70 percent of ITO contracts in the second quarter. BPO is ahead of last year at the half-way mark, boosted by a more active second quarter. Geographically, the region was led by India, which achieved a slight gain in ACV and a 26 percent increase in deal counts for the half, compared with a weak performance from the rest of the region, most notably Australia and New Zealand. The region's three largest outsourcing industries – Financial Services, Telecommunications and Manufacturing – were off from their first-half pace last year.

"Looking ahead, we're bullish on the short term, expecting year-over-year growth in the third quarter," said Keppel. "Longer term, the picture is murkier, as the market adjusts to a wave of emerging technologies, a move toward greater digitization, and entirely new operating models.  The focus will shift to more transformative work rather than largely on costs. While cost management will remain important, most of the new spending will be prioritized on revenue-generating activities. Service providers that are able to augment their traditional services with new cloud, automation and digital capabilities will be in a much stronger position to succeed than competitors that try to wring every last dollar out of declining service models and markets."

Now in its 51st consecutive quarter, the ISG Outsourcing Index™ provides a quarterly review of the latest sourcing industry data and trends for clients, service providers, analysts and the media. For more than a decade, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance.

The results of the 2Q 2015 Global ISG Outsourcing Index™ were presented today during a conference call and webcast for the media and analysts. To listen to an audio replay of the call and view presentation slides, please visit http://www.isg-one.com/web/research-insights/isg-outsourcing-index/.

About Information Services Group
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience and global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 900 employees and operates in 21 countries.

For additional information, visit www.isg-one.com.

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