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[April 25, 2006]

Global outsourcing biz creates record

(Ecomonic Times, The (India) (KRT) Via Thomson Dialog NewsEdge) Apr. 22--BANGALORE, India -- The first quarter of '06 has seen the global outsourcing industry posting a record performance. The segment saw $22.7 bn in total contract value (TCV) for contracts valued at $50m or more, up 173 percent y-o-y, comprising a record number of 83 outsourcing transactions, according to TPI Index, a quarterly report on the state of the global outsourcing industry by sourcing advisory firm TPI Inc.


"Restructuring of the first-generation agreements have yielded an increased impact on both the volume and the value of contracts in the broader market this quarter, with restructuring representing 33 percent of the TCV signed as against 24 percent of TCV during all of 2005, " said Siddharth A Pai, partner & managing director, TPI India. He further added that contract expiration was the major reason for restructuring apart from the higher incidence of companies switching to different service providers in the first quarter.

Restructuring includes renegotiations, extensions and renewals of existing agreements. The 19 contracts restructured this quarter were worth $7.5 bn and this contract restructuring led to increased average TCV for outsourcing contracts this year.

Business process outsourcing (BPO) transactions also experienced a distinct increase this quarter. The number of BPO transactions is up 63 percent y-o-y, totaling 49, which makes an all-time high for BPO contracts signed in a single quarter. In terms of TCV, Q1 was also strong with $7.3 bn in total BPO value. American firms signed approximately two-thirds of all BPO contracts led predominantly by the financial services industry, which accounts for more than 30 percent of total BPO contracts and 46 percent of the total value signed.

Mr Pai said, "annualised revenue of the Information Technology Outsourcing (ITO) industry will decline by 3 percent-4 percent while the BPO industry will witness an increase of double digit number this year."

A study done by TPI disputes the widespread market claims that outsourcing can reduce costs by over 60 percent. In reality, savings net of professional fees, severance pay and governance costs average 15 percent and range between 10 percent at the bottom end and 39 percent at the top.

However, the research shows that cost reduction remains the primary motivation in current outsourcing contracts. But an increasing number of companies are outsourcing primarily in order to improve quality, up from 11 percent in 2004 to current 21 percent. Mr Pai comments, "we are seeing an ever-growing number of clients using outsourcing as a way of introducing innovation into their business."

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