Long-term outsourcing deals decline

Long-term outsourcing contracts may have shrunk in volume and value, according to a quarterly global outsourcing report released by TPI, leading consultants for outsourcing operations.

According to TPI Index, for the first time, the July-September quarter saw a decline in contracts by volume and value, compared to the same quarter the previous year.

The cause of the falling aggregate contact values can be tied to the decline in contract durations, especially for Information Technology Outsourcing (ITO) deals.

Since 2001, the average duration of a broader market contract has decreased 12%. In ITO, it decreased 18% and for Business Process Outsourcing (BPO) it dropped 5%.

“There have been an increasing number of smaller, single-process contracts compared with larger, multi-process contracts in recent years. This trend holds true for both BPO and ITO contracts,” said Siddharth Pai, partner and managing director, TPI India. Shorter term contracts have become more popular. Only 12% of contracts signed in the broader market have 10 or more year terms.

An unprecedented percentage of contract restructurings, with even shorter average contract durations, was the other principal contributor to the smaller total contract values.

TPI found that fewer multi-process contracts (ITO + BPO) have been signed so far in 2006 than in each of the past three years. To date, there have been seven, compared with 20 in all of 2004, and 11 in 2005. By total contract value (TCV), multi-process contracts account for only 10% year-to-date, compared with 24% in 2004 and about 12% in 2005.

TPI expects BPO to grow by roughly 10% year-on-year due to the large number of under $25-million contracts. Although on lower TCV, BPO saw a great deal of activity in the third quarter, with 58 signed contracts - up 23% quarter-on-quarter, and more than 26% year-on-year. The value of the third-quarter contracts exceeded $4.5 billion, which is up about 9% quarter-on-quarter, but down 15% year-on-year due to the number of single-process deals.

On the global service provider landscape, TPI reports that Indian-based providers continued to gain TCV market share, increasing to slightly over 4% of the broader market so far in 2006, from nearly 1% in 2004. Their share of awarded contracts has also increased to nearly 8% during the same period, from about 2%. India-based providers are beginning to sign business in infrastructure-related areas, and they have over 25% TCV share in the pure applications development and maintenance (ADM) market, more than any single multinational service provider.