Getting new outsourcing deals was tougher in 2010 than 2009, TPI

The year gone by was a gloomy year for the global outsourcing industry when value of new contracts slipped 30%, according to TPI, the largest sourcing data and advisory firm in the world.

The biggest fall was witnessed in the BPO space which made up for around 22% of the total publicly disclosed deals tracked by the firm in 2010. The total value of all BPO deals fell by 31% for the full year to $17.8 billion. The fall was steeper in the final quarter of 2010 when it recorded just $2.8 billion worth of BPO deals — down 63% from the same time a year ago.

IT outsourcing, in which India has a nearly two-thirds marketshare, did better, but was down by 4% for the full year. It hit $61.2 billion for the full year, including $19 billion during the final quarter. However, due to the high number of deals clocked during the final quarter of 2009, the quarter registered a decline of $19%.

“IT outsourcing continued to drive the overall market… Application Development & Management (ADM) contracts with Infrastructure included were a bright spot for the year, nearly doubling in value,” it pointed out.

Interestingly, nearly one third of the new contracts in 2010 were those that were renewed, renegotiated or restructured — a substantially higher proportion that in 2009. It was as high as 42% in Financial Services outsourcing.

Yogesh Aggarwal, analyst with HSBC Securities and Capital Markets, saw the high proportion of renegotiated contracts as a positive sign for the Indian IT service companies like Infosys and TCS.

“[It] provides an opportunity to Indian IT companies to win a larger share of the outsourcing pie. Restructuring is particularly noteworthy in the integrated applications and infrastructure deals where incumbent Indian companies (stronger in the applications space) are able to win a large share of the infrastructure outsourcing spend,” he wrote in a note on the subject.

The 2010 numbers further confirmed the view that companies are less and less likely to award all their outsourcing contract to a single player and are more likely to break up their requirements into smaller contracts and distribute them among two or more vendors. The trend too is seen as helping Indian companies compete better with global peers like IBM and Accenture, which are several times the size of the Indian players and offer all in one services.

The number of single-vendor companies have dropped steadily from around 38% ten years ago to 24%, according to TPI data. As a result, the number of smaller deals (size less than $50 million) has increased 65 to 305 during the same period while billion-dollar deals fell from 24 to 14 during the decade.

“As they have grown disillusioned with single-source arrangements, global organizations are increasingly opting to employ multi-sourcing strategies,” said John Keppel, Partner and President-Information Services & Chief Marketing Officer of TPI. “We expect the preference of companies to multi-source will continue to grow as it allows them to tap the best talent possible for their needs,” he added.