When one headline states: “Number of New IT Outsourcing Deals Hits All-Time High” and another cries, “NelsonHall: ITO Spending Returns to Flat Growth in Q3, but Continued Decline in ITO Bookings Activity is a Concern,” it is easy to wonder just whom to believe.
Getting an overview of the IT outsourcing sector can be tricky. Data abounds, but research reports can seem to contradict each other and it is difficult to tell exactly what is being measured and if different reports are measuring the same things.
These two seemingly contradictory reports are a case in point. If new outsourcing deals are at an all-time high, how can a continued decline in bookings be a concern? The trick is interpreting each report within its proper context, identifying the relevant sections and building a bigger picture overview of the sector as a whole.
Dominique Raviart, ITO Research Director at NelsonHall, advised that those scrutinizing the sector need to bear in mind that IT outsourcing refers to multi-year (mostly run services) contracts, and does not include short-term (build) services such as consulting, systems integration and application development.
“The ITO market is a maturing market in terms of contract opportunities with a fragmented vendor landscape. This has been true for 20 years. What is relatively new – in the last five to ten years – is the effect on prices of offshoring and of, increasingly, cloud computing in its infrastructure form – private and public clouds,” she said.
As a result, Raviart said, spending on IT outsourcing overall is declining annually by zero to three percent. “This depends on economic conditions and varies by geography and by service line. For instance, application outsourcing spending is still growing by two to three percent while IT infrastructure management tends to decline currently by one to two percent. Referring to 2014-2015, she said, “Overall growth in ITO spending should be flat.”
Raviart explained that clients now award their ITO work through multi-year contracts, and those bookings capture spending over a number of years, typically five. NelsonHall also tracks the combined TCV (total contract value) of those contracts on a quarterly basis. “Since 2002, TCV/bookings have gone down very significantly, in a non-linear manner, and the level of TCV is now half of that of the best year (2003: ~US$60bn),” she said.
Raviart added: “The value of contracts varies from $10m to $2 billion. The large contracts have long decision cycles, from 12 to 24 months. As a result of large contracts, booking quarterly variations are difficult to analyze. What matters is the trend over several quarters.”
For contracts with TCV over $100m, NelsonHall has noticed that the level of new scope contracts has decreased from 90 percent in 2003 to 30 to 40 percent currently. “This means that most contracts are now renewals. The market is therefore saturated, at this point. The market is currently saturated because only a certain number of clients have decided to outsource. However, new clients in non-traditional ITO geographies may decide to adopt outsourcing at some point in the future, typically public sector outside of the U.K,” she said.
There are points of overlap. ISG and NelsonHall agree that the third quarter came in weaker for ITO awards. Esteban Herrera, partner with ISG, stated that there was a slower third quarter in ITO and that can be attributed to fewer new scope, as opposed to deal restructuring, awards.
ISG’s view of the sector, however, is somewhat more optimistic. “The year-to-date picture still remains solid,” Herrera said. “The broader market had a strong first half which boosted ITO’s year-to-date achievements in both annual contract value and counts.”
Herrera added: “Where we disagree is that we feel that the YTD (year-to-date) picture for ITO awards is more robust, whereas they (NelsonHall) see it lagging. It probably comes down to the fact that we have more data in our pool of contract awards to analyze.”
Herrera illustrated the point by noting that the ITO market needs to see only $1.3 billion in ACV (annual contract value) awarded in this fourth quarter to equal its overall 2013 numbers. In 2014, both ACV and number of contracts are at record highs for ITO.
Regional perspectives do vary, though. Herrera said: “In the Americas ACV is up nearly 20 percent this year, a remarkable performance in a mature market, with particular strength in infrastructure. Clearly, the most mature segment of the outsourcing industry in the most mature region is enjoying a bit of a resurgence as companies look to third parties for help with modernization of their IT.”
He explained that even though the number of awards increased only seven percent, ITO contract counts in the Americas sit at an all-time high through three quarters. “The trends in the Americas have been consistent: lower unit costs, shorter terms, more multi-sourcing, all wrapped up in an environment of greater spend as the economy recovers and companies look to fuel growth,” Herrera said.
EMEA (Europe, Middle East and Africa) ITO ACV rose nearly 15 percent over this time last year, and ITO counts increased by an even greater percentage, according to ISG. “Both measures reached an all-time high, despite indications of a slowdown in the third quarter. Infrastructure so far this year has outpaced its performance in any prior year, due in part to very strong activity. ADM presents a picture of consistency in EMEA, with year-to-date ACV exactly as it was a year ago. In fact, ADM has stayed within a very tight range since 2009,” Herrera added.
He went on to say that most of the sourcing activity in Asia-Pacific this year has been in ITO, and both ACV and number of awards set a record high.
Why the Discrepancies?
While NelsonHall points to the need for concern, ISG highlights a more positive outlook – and service providers are left wondering who to believe.
So why is there a seeming contradiction in terms of the research available? In many instances it has to do with the fact that different firms are not comparing the same things. Raviart noted that, from a broad perspective, NelsonHall and its competitors all make a number of decisions on contract timing – when do they include a contract in their numbers, at the time of the negotiations, at the signing, at the time you are aware of it and believe it is almost certain the deal will be closed and so on – in terms of TCV, on the geography, or on the service line.
“Deal coverage is also an issue: some countries have adopted the advisor model, especially the U.S., some rely on the Big 4, some use individuals, some use their internal capabilities and finally, some use a mix of all possibilities. Therefore coverage can be non-exhaustive or be biased by the nationality of the advisor firm, its investment in expanding its coverage and so forth,” she said.
Raviart reiterated: “We believe our booking analysis seems to us consistent with our annual spending analysis i.e. bookings are down and showing little-new scope contracts. Spending is also declining.”
Herrera explained that ISG’s Outsourcing Index defines the broader market as commercial contracts with an annual value of $5 million or greater. “This is the primary criteria we use when describing market trends. We do cover the public sector but we do so separately from the commercial market and our findings are presented every six months in the first and third quarter Index calls,” he said.
ISG also has a data exchange with more than 90 service providers in which they provide ISG with data on contract awards that are not announced publicly, as well as firming up its total contract value estimates on awards where no deal value was made public. “It all adds up to provide a very holistic picture of the market,” Herrera emphasized.
Tesla Martinez, Director of International New Business Development at Focus Brands International, who has worked with research companies around the world, said that firms need to ensure that their data is relevant, accurate and internationally cross-comparable.
“For example, in India A+B=C whereas in Brazil XY=C. Same outcome, different way of getting there. Understand how the researcher got there,” she explained, adding that, using the analogy above, it is important to understand that not all variables are available across markets, when looking at different research reports.
She advised that those in the ITO sector need to ask questions about different reports: Did the research use different variables? Which markets? Are they measuring the same data point?
Martinez explained that the ISG report measures different periods of time across the Americas. The second report, by NelsonHall, measures North America, leaving out the rest of the Americas, then measures Europe and “lumps in Brazil, India and China in a statement. This is not cross-regional comparable,” she said.
So while reports from different companies point to contradicting trends or statistics, it is often the case that they are not measuring the same things. The important lesson to learn is that research reports are specific to the context in which they are produced and the focus and methodology of the particular firm involved. An analysis of differing reports will likely highlight differences in approaches, focus areas and methodologies and help those in the sector extrapolate the data relevant to their context and needs.