Outsourcing contracts slow in 2007

A 25% drop in new contracts and a 17% decline in restructured contracts indicated 2007 could be a slow year for global outsourcing companies.

Researchers at TPI recently released its TPI Index analysis of the global outsourcing market for the second quarter, and the found that deals have dropped considerably when compared to the same time last year. To start, one-quarter fewer deals have been signed midway through the year than in 2006, and the average total contract value (TCV) of deals so far in 2007 is about 34% less than deals in the same time last year.

TPI reports the average TCV, about $33 million, is the smallest first-half award values since 2001. Another metric, the annualized contract value (ACV), is down 30% from last year's figures as well, at $5.5 billion. Existing deals also saw a downturn. According to TPI, restructured contracts -- defined as "renewals, renegotiations and related changes to prior contracts" -- accounted for 26% of all sourcing agreements last year, but so far in 2007 contract restructurings represent only 17% of the larger market.

"The Index shows that the pace of contract restructurings slowed considerably in the first half of this year. That development, in turn, pulled down the overall market value of sourcing transactions, especially in the Americas," a TPI press release says.

Not only are fewer deals being signed, the value of the deals is dropping as well, TPI reports. The TCV of new deals -- 56 contracts in the Americas, down from 86 in the first half of 2006 -- is $10 billion, significantly less than last year's $24 billion and the lowest first-half TCV value since 1995, the advisory firm says.

The drop in deals could indicate outsourcing vendors are facing some stiff competition from offshoring options, TPI says.