Press Release

ISG Index: Global Outsourcing Industry On Track For Strong 2014, Despite 3Q Softness

3Q value and volume off on tough compare with strong year-ago quarter, but record 1H growth and strong 4Q finish should propel industry to double-digit growth for the year;

YTD, ACV up 13 percent, to $17.1 billion, driven by ITO and new scope awards; YTD contract volume up 4 percent;

Across-the-board weakness seen in 3Q versus strong last quarter and prior year;Americas the lone positive year-over-year, helped by favorable compare to weak 3Q13

Company Release - 10/14/2014 11:36 AM ET

STAMFORD, Conn., Oct. 14, 2014 /PRNewswire/ -- The global outsourcing industry remains on pace to achieve double-digit growth for 2014, despite a weak third quarter, Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company, said today.

Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show that, year to date, ACV is up 13 percent, to $17.1 billion, fueled by double-digit increases across most regions, service areas and contract types and sizes. Contract volume is up a more modest 4 percent.

In the third quarter, however, ACV declined by double digits in virtually every geography and segment, as the global market paused from a scorching first-half pace that saw ACV top $6 billion in each of the first two quarters.  Compared with a strong third quarter in 2013, global ACV was down 21 percent, to $4.6 billion, while the number of contracts signed dropped 32 percent, to 239 in the quarter.

"As we forecasted, the above-normal production in the first half wasn't sustained in the third quarter, but we believe this is only a temporary pause – not a sign of a slowing market – as work is pushed out into future quarters.  Indeed, we see deal activity and values picking up again in the fourth quarter, leading to double-digit growth for the year and numbers perhaps approaching record levels for 2014," said ISG Partner and President John Keppel.

Added Keppel: "The industry faced a tough comparison versus last year and last quarter, when activity was particularly robust.  Strong third quarters were becoming the norm the last few years, but this year's third-quarter reverted back to form; this period historically has been the weakest of the year. Still, year-to-date performance looks very strong on the tailwinds of a record-breaking first half, and from our market intelligence and knowledge of the industry pipeline, we should see a strong finish to 2014."

In the third quarter, the declines in ACV and in the number of contract awards were driven by a fall-off in both new-scope and restructured deal activity.  The number of mega-relationships, those valued at over $100 million, and awards in the smaller contract-value bands dipped noticeably.

By domain, information technology outsourcing (ITO) was down 23 percent from the prior year, largely because of the decline in new-scope awards.  The uneven business process outsourcing (BPO) market also declined, albeit by a smaller amount, but rose in the Americas and in new-scope awards. The BPO market is now characterized by more sourcing in contact centers, facilities management and industry-specific work, having shifted away from horizontal back-office functions.

ACV in the Americas region, at $1.9 billion, was up 11 percent versus a soft third quarter last year, helped by large contracts in Canada and Brazil, even as deal count dropped by nearly 30 percent. The region's year-to-date performance, with ACV up 18 percent, was fueled by sharp increases in the value of new-scope contracts, up 30 percent; ITO contracts, up nearly 20 percent, and BPO contracts, up 17 percent.  ITO contract counts are at an all-time high through nine months, reflecting the trend toward more contracts amid increased multi-sourcing.  Financial services, energy and manufacturing were bright spots among BPO industry segments.

EMEA, the world's largest outsourcing market, mirrored the broader market and saw declines in value and deal count versus a strong third quarter in 2013.  But the region looks quite healthy from a year-to-date perspective, with growth in new-scope ACV (up 12 percent) and ITO ACV (up 14 percent) driving the market.  BPO value and contract counts, meanwhile, dropped by a third compared with the first nine months of 2013.  Sourcing activity in EMEA continues to spread beyond the more mature markets of the U.K. and DACH, penetrating further in France, which saw sizeable awards in banking and transportation, and in Spain and Italy on the strength of activity in the automotive and financial sectors.

Asia Pacific's record-breaking pace in the first half slowed due to a lack of large-deal activity in the third quarter, as ACV fell 27 percent and deal counts shrank by more than 30 percent.  As with the other regions, the year-to-date picture in Asia Pacific is much rosier, with ACV up 60 percent, driven by growth in new-scope and restructured contracts, and ITO value that has reached a record high. Australia/New Zealand (ANZ) and Japan have been the sub-regional stars thus far in 2014.  ACV in ANZ is up nearly 40 percent year to date, while Japan's market value climbed almost 70 percent, primarily due to large awards in banking and manufacturing. China and India, meanwhile, continue their comeback years, with ACV in both markets far exceeding that of the previous year.

ISG also analyzed the growing public sector market, which as recently as five years ago, held roughly the same share of the global market as the commercial sector, but has since grown to account for nearly two-thirds of global outsourcing value annually.  Public sector ACV, at $39 billion, has increased 15 percent in the past year alone.  Most of the activity comes from ITO, and from the U.S. and Canada, which together account for 69 percent of the global public sector market.  In the U.S., growth is being spurred by Department of Defense spending, as well as from federal agencies looking to consolidate data centers and move toward shared services. 

Now in its 48th consecutive quarter, the ISG Outsourcing Index provides a quarterly review of the latest sourcing industry data and trends for clients, service providers, analysts and the media.  For more than a decade, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance.

The 3Q 2014 ISG Outsourcing Index was presented during a conference call and webcast for media and analysts today.  To listen to an audio replay of the call and view presentation slides, please visit http://www.isg-one.com/web/research-insights/isg-outsourcing-index/.

About Information Services Group

Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience and global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 850 employees and operates in 21 countries.

For additional information, visit www.isg-one.com.

To view an infographic summarizing these data, visit: http://www.slideshare.net/ISG_Inc/3q14-isg-global-outsourcing-index

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SOURCE Information Services Group