John Keppel

ISG Index Finds 2014 to Be One of Outsourcing’s Strongest Years Ever

The global outsourcing industry ended 2014 on a high note, turning in one of its best fourth quarters ever. That performance, coupled with an exceptionally strong first half, helped the industry overcome a weak third quarter to post its third-best year in the last decade.

Findings from the recent ISG Outsourcing Index show that fourth-quarter annual contract value (ACV) was nearly enough – at $5.8 billion – to deliver what before might have been unthinkable: three quarters of $6 billion in ACV in a single year. Total ACV for the year topped $23 billion for only the third time in the last decade; the other two were in the post- global recession years of 2011 and 2012.

The 16 percent rise in ACV for 2014 was fueled by growth in IT outsourcing (ITO), new scope and restructured contracts, and mega relationships.


Looking at the fourth quarter, the double-digit growth we forecast came to fruition, with ACV up 27 percent. That strength rippled through all regions. A buyer’s market in the Americas drew in additional clients who couldn’t pass up the chance of getting more services for less. As a result, the growth rate in the Americas more than tripled EMEA’s. We expect that same buyer’s market scenario to develop in EMEA and Asia Pacific as those markets mature. Consolidation stirred activity in France, and large deals kept Asia Pacific moving.

Contract values were not the only metric on the rise. The 318 deals closed in the fourth quarter (up 6 percent) and the 1,218 for the year (up 4 percent) both claimed spots as second-highest ever.

The ISG Outsourcing Index, which measures commercial outsourcing contracts with ACV of $5 million or more, derives its findings from a contract database of more than 350 publicly held sources, confidential provider information and data from ISG engagements. Here are the highlights:

By Domain…

Information technology outsourcing (ITO) continued to log steady growth in ACV, up 13 percent for the quarter and 19 percent for the year, to close out 2014 at $17.3 billion. Despite a slight drop in counts, the always-choppy business process outsourcing (BPO) market grew 80 percent in the fourth quarter to finish the year up 8 percent, at $5.8 billion.

By Contract Type…

As clients sought greater flexibility and looked to capitalize on lower unit costs, the value of restructured contracts rose 16 percent for the year, 77 percent in the fourth quarter. While growth in new scope award value also increased 16 percent for the year, it inched up by only 1 percent in the fourth quarter. Still, the total value of new scope awards for the year was higher than that of restructured deals, $14 billion compared with $9.1 billion, even as growth in the number of restructured contracts grew 9 percent compared to only 1 percent for new scope.

The value of mega-relationships – deals worth more than $100 million annually – surged a whopping 354 percent in the fourth quarter, and 53 percent for the year, to reach $6.2 billion in 2014.

By Region…

Americas: We’re seeing more consistency in ACV in the Americas, with each quarter in 2014 hovering around the $2 billion mark. Growth in the Americas in Q4 came from activity rather than award size. ACV rose to $8.2 billion, only 8 percent over the prior quarter but more than 40 percent over this time last year. The proportions are reversed when we look at contract count: there were 25 percent more awards over last quarter but only 8 percent more than Q4 2013.

Steady ACV coupled with rising counts suggests an increase in demand in the Americas, especially for ITO services, for which contract value grew 18 percent in 2014, marked by a number of larger deals for bundled IT services. As companies invest in adding capabilities to spur growth, we are seeing a shift in contract share from infrastructure to applications design and maintenance (ADM). BPO contract activity also increased as clients sought industry-specific solutions.

As slumping oil prices led energy companies in the Americas to take a fresh look at outsourcing, ACV for this industry was up by more than half over the prior year. Meanwhile, financial services ACV, at $2.1 billion, reached an all-time annual high.

EMEA: For the eighth year in a row, Europe, Middle East and Africa (EMEA) led the world in contract value, at $11.9 billion, with ACV up 19 percent in the fourth quarter and 7 percent for the year. The number of contracts, 588 for the year, was at a near-record level. While ITO contract value in EMEA rose 13 percent, fueled by large infrastructure awards, BPO slumped for the second year in a row, down 12 percent.

The region’s two largest markets – the U.K. and DACH – recorded solid growth, while France surged ahead in both ACV and contract counts. A less mature sourcing market, France is seeing growing demand amid service provider consolidation, opening the door for India-heritage firms to make further inroads. Among industries, manufacturing, energy and transportation all registered double-digit growth in ACV, although the region’s largest sector, financial services, was down by double digits, turning in its lowest ACV in the last five years.

Asia Pacific: After a dip in the third quarter, Asia Pacific came roaring back, with ACV up 21 percent in the fourth quarter. Although its second-half numbers weren’t as strong as its first half, Asia Pacific’s annual ACV was still up by 45 percent over 2013, while contract counts climbed 11 percent. ITO contract value in this region soared 50 percent, to reach a new high, as did the number of awards, while BPO recorded one of its weakest years ever. Virtually all of the major markets in the region saw an increase in ACV, with the two largest, Australia-New Zealand and India/Southeast Asia, being the strongest. Among industries, telecom and manufacturing both claimed exceptional ACV growth, with the former nearly tripling its 2013 numbers and the latter more than doubling its contract value from the prior year.

As for 2015…

We expect healthy numbers once again, though growth in the first half will be flat, at best, in comparison with the strong first half of 2014. Looking ahead, we see the sourcing industry balancing at a major inflection point. Competition is heating up between Western-heritage multinationals, India-heritage firms and niche players, while cloud providers join the fray, particularly in infrastructure services. More than 1,800 broader market contracts are up for renewal in the next two years, and nearly half of those are being re-bid competitively. Although competition may drive down unit costs, we anticipate growth opportunities, particularly in applications, as digitization continues to transform the way work is done. Over the next few years we won’t be surprised to see our regional provider leader boards change dramatically as new providers and combinations emerge and existing firms are bought out, bailed out or bow out.

We presented the 4Q 2014 ISG Outsourcing Index during a conference call and webcast for media and analysts on January 15. View presentation slides on the ISG Outsourcing Index page.

John Keppel

About John Keppel

John Keppel is the voice of the ISG Outsourcing Index and an industry-wide observer and commentator. John leads the Research and Managed Services business within ISG in addition to his responsibilities as Chief Marketing Officer. With significant deal advisory experience, John is a specialist in the Insurance Industry in both the IT and BPO arenas. Email:
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