by Stephanie Overby

U.S. Appetite for Outsourcing Deals Slowing Down

Oct 18, 20073 mins

IT outsourcing deals are shrinking, with the strongest demand for technology services coming out of Europe and Asia, according to third-quarter industry analyses.

The total contract value of outsourcing contracts signed in the third quarter of 2007 was down 16 percent, with the actual value of the contracts signed shrinking as well, according to outsourcing adviser TPI. At the heart of the decline: the slowing pace of contract awards in the U.S. TPI’s numbers show that U.S. companies are also keeping a lid on outsourcing growth, with new scope down 50 percent from last year.

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Conversely, Europe and Asia are showing growth in outsourcing deals year over year, with Europe accounting for more than a 50 percent share of global market deals. New scope is up 36 percent in Europe and 72 percent in Asia Pacific, according to TPI. Competitor EquaTerra also found that outsourcing growth was strongest in the Europe/Middle East/Africa geography.

Almost as many Global 500 companies are inking outsourcing deals in the U.S. and Europe (43 percent of leading U.S. companies and 52 percent of leading European companies), says TPI. It’s just that the American deals are smaller.

Mega-deals—those once popular billion-dollar-plus behemoths—are still getting signed (by General Motors, Johnson & Johnson, Credit Suisse, Reuters and the U.K. Post Office, among others). They’re just getting less “mega.” The average size of the billion-plus contract in the first quarter of last year was $9.6 billion. In the third quarter of 2007, it was down to $2.4 billion, TPI reports.

Major India-based vendors have seen their U.S. customer revenue increase 37 percent, despite the slowdown in overall outsourcing in the Americas, says TPI, adding that “the latter exemplifies the diversity in the global outsourcing industry as well as India’s expanding influence and strength.” Meanwhile, EquaTerra’s third-quarter survey revealed increasing interest in offshoring outside of India. Wage inflation, U.S. dollar weakness and changing buyer demands are driving the expansion of delivery centers in China, Central and South America, and Central and Eastern Europe, EquaTerra notes.

Business process outsourcing (BPO) analyst firm Nelson Hall says the BPO market is hot, with year-over-year total contract value growth of 26 percent in the third quarter and 54 percent growth during the first nine months of the year. TPI characterized global BPO growth as “sluggish.” But both TPI and Nelson Hall’s reports agreed that BPO contract activity was strongest in North America.