Value of outsourcing contracts shrinks

Outsourcing providers face increasing challenges in 2007, according to the latest Quarterly Index from outsourcing advisor TPI.

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 value of contracts entirely new to the market (excluding the retendering of existing contracts) declined by eight per cent on 2005 levels.

The trend towards shorter and smaller contracts, and more specialist and single process deals, means that tendering activity nevertheless remains frenzied, with a record number of 350 contracts being agreed in 2006 – smashing last year’s 341, the previous record.

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.'

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 per cent in the last four years, from 55 in 2002 to 90 in 2006.

'In general terms, this increased competition is clearly good for buyers,' said Aitchison. However, greater diversity and specialisation amongst suppliers, combined with more frequent tendering, does mean more complexity in both the procurement process and the management of outsourcing contracts.'

Those service providers headquartered in India, such as Wipro, Tata, and Infosys are reaping the benefits of the trend towards single-process and specialist deals. In 2006, the India-based providers achieved 7 per cent of the total market share. This is a massive increase compared with their 2002 market share of less than half a percentage point.