Growth in business process outsourcing, which includes HRO and FAO, showed the most significant downturn for a quarter ever, according to research firm TPI. The sector was indicative of an overall downturn in all outsourcing activities.
The trends were documented in TPI’s quarterly survey results.
The fall in overall outsourcing contract activity is exemplified in BPO’s decline. The first quarter experienced the smallest number (29) and lowest total contract value (TCV) of BPO contracts greater than $25 million being awarded in almost five years, according to TPI. The BPO share of the broader market TCV was down 50 percent quarter-on-quarter and 66 percent year-on-year. The adoption rate of BPO has hit a soft patch and is expected to grow at only two percent over last year—well off the double-digit pace of prior years.
TPI said this is partly due to customers’ concerns about whether BPO is meeting their needs. Also, buyers are prolonging their decision-making on some processes, particularly as they wait to hear more positive reviews from the early adopters of HRO. This trend is expected to continue throughout 2007, with the marketplace becoming more competitive as provider capability expands in 2008 and beyond.
Peter Allen, partner and managing director of market development at TPI, explained that the results show a continuation of trends established in last year’s second half and point to a reorientation of the marketplace after years of mega-deals.
“Organizations are engaging in shorter-term deals with smaller contract values because they want best-of-breed solutions,” Allen said. “We are advising our clients to strive to align their sourcing needs with their business strategies and to consider the maturity of the service provider marketplace.”
BPO, said TPI, is now growing at a rate less than that of information technology outsourcing (ITO).
The Index also revealed a shift in the prevalence of contract restructurings. Restructurings were a major part of the market during the past two years; however, the pace has slowed dramatically in the first quarter of 2007. This quarter, 12 out of the 68 contract awards were restructuring-related valued at almost $3 billion, compared with 19 contracts restructured worth $7.5 billion in the first quarter of 2006. Overall, the number and TCV of contract restructurings have declined during the past three quarters. TPI links the decline to incumbent service providers adjusting the scope and terms in advance of the natural end of the contract.
“Even as the overall market slows, major service providers maintained their relative market shares in the latest quarter and there is a more diverse base of incumbent providers with contracts up for renewal,” Allen noted.
Despite a soft first quarter overall, TPI’s projections still show modest growth in annualized revenue for 2007 compared with 2006, driven largely by the lack of significant large-scale contract terminations in recent quarters. The first-quarter data provides some visibility into the annualized revenue that service providers will recognize in 2007. Despite the slow start to the year, annualized revenue should increase modestly in 2007 by about 3.9 percent, driven by a 4.4 percent year-on-year increase in ITO.
