Outsourcing advisory firm TPI held its quarterly talk this morning, and I tuned in to learn what I could about the big deals that so define this industry.
Peter Allen does most of the talking — and if he weren’t a partner and managing director for market development at TPI, he could easily get a job as a DJ playing classic rock for The Mountain.
But I digress.
This quarter’s big news: The big just got bigger. The total for contracts value at $50 million or more (which is what TPI tracks) was up 173% year over year — $22.7 billion. That represents 83 outsourcing transactions worldwide. Forty-four percent of that was awarded to the big six service providers, EDS, IBM, CSC, HP, Accenture and ACS.
A third of that represented new signings of restructured contracts, representing renegotiations, extensions and renewals
What’s behind the restructuring activity? According to TPI, one motivation is the perception by the client that the service provider hasn’t delivered on the promise — particularly around innovation and maintaining a competitive advantage in the client’s industry. Clients are tracking the record of the provider to aggressively move to a cost profile relative to current market trends. If the clent finds its provider is "widely out of the market," that really motivates the organization to make a switch.
Presumably, it also acts as a wake-up call to the service provider. Incumbents won back the business 86% of the time.
The industries most represented in this quarter’s deals were manufacturing (27%) and financial services (20%).
Business process outsourcing (BPO) was also a big tale. TPI said the number of BPO transactions was up 63% over last year, and the tally of 49 contracts for 1Q06 marks "an all-time high" for BPO contracts signed in a single quarter. In this category financial services led with 46% of the total value signed.
Interestingly, Allen shared this tiny remark: "For BPO the anticipated operating (net) savings averaged a little more than 15%; it ranged up to a high of 39%; the mode was between 10 and 20%." Companies that expect financial miracles will be sadly disappointed.
On the India front, TPI still doesn’t name particular service providers on its slides except where one or another is involved in a major TPI-advised contract (Wipro and Infocrossing had their logos shown this time). But Allen did say "When we have an initial conversation with a client, in the past — as recently as a year ago — the conversation would be about outsourcing. And we’d have to introduce the subject of offshoring. Now when clients say outsourcing, they mean offshoring. It’s become a given. It’s the rare exception that the client says I’m unwilling to have services delivered offshore."
Plus, the multinationals are on a bit of a buying spree, sucking up companies to fill out their capacity globally — especially in India. EDS’ bid for MphasiS is simply the latest.
I encourage you to listen to these programs. They’re available by Web real-time and in archive form; however, you won’t be able to pose questions like the analysts on the phones do. I always feel like I’m eating lunch at some pricey Dallas restaurant where the guys are talking too loudly at the next table, but what they’re sharing is so interesting, I don’t want to rush through my dessert.
Here’s a link to the slides and the Webcast.
Tomorrow, April 13, 2006, TPI will host its Europe call on the same topic — at 10:30 BST.