The fourth quarter of 2009 had to play catch up for the misgivings of the first half of the year. Was it enough?
By Debbie Bolla
When asked if you want to hear the good news or bad news first, it’s always a smart idea to go with the good news. TPI Index released its 4Q09 Global Index a few weeks into 2010. The report measures commercial outsourcing contracts valued greater than $25 million, and showed the market’s total contract value (TCV) for the fourth quarter reached $24.7 billion, an increase of 47 percent sequentially, and the best quarterly performance since the second quarter of 2008. But the boost wasn’t enough. TCV for the year declined 13 percent to $74.5 billion, its lowest point since 2001.
“Looking at the marketplace overall, we were dealing with a significant recession,” said Mark Mayo, partner and president, global operations, TPI. “The data shows that we bottomed in the first half of 2009 and we are coming out of that in the second half. We didn’t spring back or bounce back, but we are seeing solid progress.”
A good amount of that progress is coming from the IT outsourcing (ITO) space. “It was very heavily ITO driven,” commented Mayo. “Mega deals came back so there was positive success in the second half of the year. We hadn’t seen that for about four quarters.” TCV in this category increased 54 percent over the prior quarter and 32 percent over a year ago to $19 billion, the highest quarterly total in six years, with large-scale deals including Zurich Financial Services Group and Alcatel-Lucent.
The fourth quarter proved that the market for business process outsourcing (BPO) is making some forward progress, but it’s simply not enough. Though TCV in this segment increased almost 29 percent, it remained 33 percent below the same period in 2008. For the entire year, BPO TCV dropped 38 percent to $18.5 billion, its lowest level in eight years.
Mayo dissects this distinction. “We had a very active BPO space in 2005 and 2006 with big complex opportunities,” he explained. “It was a new marketplace, and immature providers had difficulty delivering what they committed to. So the marketplace took a break and waited for service providers to fix the issues they had on their current deals, and really deliver the capability to go forward. As people have waited, the tendency has been to buy smaller chunks that are less risky chunks for the client and service provider.”
Partner and practice leader of HR advisory services Rosemary Collins saw similar challenges in the multi-process HRO space, which lead to new deals being smaller in scope, in terms of length and services provided, and in some cases with multiple providers. “Buyers are scoping their work to what’s achievable, and that’s what’s bringing to the forefront the concept of these single process solutions and having multi-provider relationships,” noted Collins.
By region, the numbers told similar stories: improvement in the fourth quarter, overall numbers down. In the Americas, TCV rose just more than 4 percent from the third quarter of 2009 but was down 17 percent year-over-year.
EMEA experienced several large transactions to push fourth-quarter TCV 135 percent sequentially and 60 percent year-over-year to $15.4 billion, the highest since the second quarter of 2008. However, full-year TCV in the region fell 21 percent. The opposite rang true for Asia Pacific. The region’s fourth-quarter TCV fell 37 percent, but for 2009, $10.5 billion in TCV represented some stabilization.
TPI’s experts are sensing optimism for 2010 despite these mixed-bag numbers. “The trend we are seeing in the second half of the year, while it didn’t bounce back, it’s solid consistent growth that we believe will continue into 2010,” said Mayo. “We are basing that on contract rates and our view into the pipeline.” Mayo is seeing some stabilization in the rate of new transactions added to pipelines, and the level of contracts coming up for renewal is up 29 percent.
Collins also envisions positive change for the upcoming year. “What we’ll see in 2010 is much smarter providers understanding what they can realistically deliver, and more educated buyers that are going to revive market,” she noted.