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| Wednesday, December 22, 2010 | |
| Strong Contract Restructuring Leads Weak Q3 | |
| Sruthi Ramakrishnan | |
| Restructuring of contracts heavily influenced the last three quarters, and will continue to influence Q4 | |
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The TPI Q3 analysis shows that a pause in the market recovery has dampened year-to-date momentum, but data and service provider feedback suggest that a more active 4Q10 is underway. Restructuring of contracts has heavily influenced how the last quarter, and in fact the annual TCV (Total Contract Value), have shaped up. “In the 1st quarter of this year there was an unprecedented 42% of global TCV which were restructuring related. At that time we anticipated more renewals were on the way. In Q3 they make 48% of global TCV,” said John Keppel, Partner & Managing Director, TPI Research, Analytics and Intelligence at The TPI Index webinar. “Restructuring TCV represents about 34% of the global market, compared to the 20% we’ve typically seen over the past 3 years.” The past quarter saw some large restructurings- General Motors, Bank of Ireland, ABN Amro, etc. In fact, six of this year’s nine mega-deals were restructurings. One of the reasons for this extent of restructuring activity is the change in the timing of renewals. “Some of the 7- 10 year contracts rewarded in the early part of the decade are up for renewal. At the same time, some of the recent 3-5 year contracts. As a result, there were more contracts being restructured simultaneously,” said Keppel. Another reason is that larger economic difficulties still cover outsourcing adoption. “In North America especially, CIOs and CFOs are returning to a restraining posture that they initially took at the start of the recession. Projects involving new scope and budget approval are once again being delayed. Restructuring which bring quicker and potentially easier returns to bottom lines tend to move forward unimpeded,” said Keppel. In numbers, restructuring constituted 20% of the market for both ITO and BPO and about 1/3rd of TCV. The relative strengthening of BPO contract restructuring shows the maturing of the BPO market as some of the larger opportunities awarded in the middle of the decade come up for renewal. On the other hand, new scope activities were down, not just in terms of global market share but also by absolute TCV numbers. New scope TCV was down significantly, by about 50% QoQ and YoY. Clearly, new transactions are not entering the market as quickly as they used to in previous years. This is being attributed at least partly to the recession and delay in new projects.
While BPO TCV is typically comprised mostly of new scope, an increasing amount is restructurings. The traditional BPO strengths- contact centers, FSO, HRO, F&A generally trended downwards and have been lower that their 2006 levels, while there was some pickup in HRO and FSO. More than half the activity in multi-process BPO was restructuring related. The emerging R&D KPO activity is picking up in volume and contracts. Region-wise More contracts were granted in EMEA than Americas this quarter, but this region is still lagging behind Americas in both metrics. Within EMEA, there seems to be a lot of activity in less mature markets. The Nordic region, the second largest outsourcing market in the world in 2010, and the Dutch market provided strength in Europe. The results in both geographies have been heavily influenced by large restructurings signed during the first nine months of this year. Geographically, APAC has shown the most fluctuation, at 49%, due to a few large deals. Industry Segment- wise Looking at the number of deals coming up for renewal, 2011 again looks like it will be very active on the restructuring front, though not as much as 2010. |
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