The first half of the year was relatively quiet for global IT outsourcing deals, but activity has picked up considerably in the third quarter. Outsourcing consultancy ISG examines why and predicts how the IT outsourcing market will finish out the year.
After a relatively quiet first half of the year, outsourcing deal activity picked up considerably in the third quarter of 2013, according to the quarterly index compiled by outsourcing consultancy Information Services Group (ISG).
The market saw its best third quarter performance ever both in terms of total contract value awarded ($5.8 billion, up 66 percent over the second quarter of this year) and number of contacts signed (343 deals were inked during the three-month period).
Third quarters are not typically so active as business decision-making tends to slow in the late summer as people go away on vacation. "It's a bounce back from a relatively slow first half, during which some decisions were getting delayed. A lot of awards were stacked up waiting for the third quarter," says Esteban Herrera, outsourcing advisor with sourcing consultancy.
The slowness of the first six months is likely attributable to economic uncertainty and an overall scaling back in terms of deal size and length. "Probably what happened is that those who may have been looking at doing one big deal in Q1 and Q2 ultimately decided to split those into two or more deals," Herrera says. "And because of that we ended up with lots of delays."
Global IT Outsourcing Activity Picks Up as Deals Are Restructured, Renegotiated or Rebid
There was also significant restructuring activity during the third quarter, continuing a trend ISG noted earlier in the year. A total of $2.6 billion in deals were either rebid, renegotiated, or otherwise reworked marking the highest restructuring activity in a single deal to date.
"We're seeing consecutive quarterly records on that because of the maturity of the market. Deals done fine three to five years ago are getting re-awarded, and clients are breaking them up," says Herrera. "One big deal is now three smaller deals." And outsourcing customers are increasingly willing to switch providers when an existing deal comes to fruition.
"Until 18 months ago, incumbency was undefeatable. Eighty percent of providers kept their business," Herrera says. Today, that's down to 60 percent, according to ISG. But among those buyers who take their deals back out into the marketplace, 80 percent select a new provider. "It's a new trend," says Herrera, "but a defining one."
Approximately $4.4 billion in IT outsourcing contracts were inked, double the previous quarter and up 15 percent over the previous year -- also the best third quarter performance ever, according to ISG. However, there was a lull in IT deals in the Americas due to a maturing market, an increase in insourcing, and some companies opting to sign one- or two-year extensions on existing contracts while they figure out what they want to do longer term, according to Herrera.
ISG predicts the outsourcing market will finish out the year strong, but still end down compared to 2012 due to weakness in the first half of the year. "We'd need a $9 billion dollar fourth quarter for a rebound, which would be unprecedented," Herrera says.
Next year could see a slight uptick in activity or remain flat , says Herrera, in part because 2009 was a big year for contracting activity and those deals will be coming to an end. In addition, outsourcing in the mid-market should continue to grow.
What's more certain is that outsourcing deals going forward will be smaller and shorter. "It's the new normal and it's happened very quickly over the last two years," Herrera says. "It coincides with greater maturity on the client side in terms of managing relationships. While there's some downside to having multiple providers and the friction that can occur, there's a great upside in keeping them on their toes and making sure everyone is best in breed. A lot of companies have decided that the advantages outweigh the disadvantages."
Read more about outsourcing in CIO's Outsourcing Drilldown.
This story, "Lukewarm Global IT Outsourcing Market Heats Up in Third Quarter" was originally published by CIO.