Software services

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Market analysis

Outsourcing contracts worldwide grew strongly in Q1 2016, both in terms of value and volume, driven by an increase in smaller deals and a record number of contract restructurings. The Q1 2016 Annual Contract Value (ACV) rose by 20%, to US$6.1 billion. The total annual value of smaller deals, below US$40 million, increased 40%, to US$4.1 billion, while the value of restructured contracts soared 48%, to US$2.8 billion. Overall, volume was up 32% versus the prior year, driven by growth in restructurings, up 78%, to a record 173 contracts, and information technology outsourcing (ITO), up 51%, to 301 contracts. The number of high value contracts, worth US$100 million or more, totaled only five for the quarter, down from seven in the prior year.

In general, 2016 has been a better performer compared to last year, with ACV exceeding US$6 billion. The strong growth in ITO value and volume also indicates that technology solutions are having a positive impact in many areas, even as the emerging trends of work moving to cloud takes shape. The total value of ITO contracts in the first quarter rose 24%, to US$4.2 billion, while the value of business process outsourcing (BPO) deals grew 12%, to US$1.9 billion.1

EMEA posted ACV of US$2.8 billion, up 19% from the prior year, while contract counts, at 160, were up 28%. Restructuring activity drove the market, with ACV up 115% and volume up 91%, the most active quarter in the last two years. Meanwhile, new scope value dropped 13%, to US$1.5 billion, its lowest level since the third quarter of 2014.

Asia Pacific continued its decline, as first-quarter ACV fell 13% versus a year ago, despite the signing of a mega deal in Australia, and contract count dropped sharply, down 23%, to its lowest level since the fourth quarter of 2011. Both new scope and restructuring values dipped slightly, but ITO value plunged more than 50%.

Outsourcing in the public sector, previously on par with the commercial sector, now far exceeds that market. In the last five years, the annual contract value of outsourcing in the public sector has more than doubled, and now accounts for two-thirds of total outsourcing ACV, or US$65.6 billion. The public sector is still dominated by large deals averaging more than US$40 million in ACV.2

Despite these positive trends, the Software Services sector was relatively flat in terms of revenue growth in Q1 2016, with an average of 0.1% decline year over year and 1.4% growth sequentially. Computer Sciences Corp was the only company to see a sharp decline of 37.9% year over year. Net income was positive for most of the companies, with an average of 19.7% year-over-year growth. TCS reported the highest growth of 51% compared to last year.

TCS posted unusually strong results in a seasonally weak first quarter, driven by its core portfolios in BFSI, Manufacturing, Retail, Life Sciences and Travel & Hospitality. Revenue for TCS in Q1 2016 was US$4.2 billion, up 2% quarter over quarter and 8% year over year. On a sequential basis, growth during the quarter was led by BFSI (+3.2%), Manufacturing (+3.9%) and Retail (+2.1%) in constant currency. On a year-over-year basis, growth was led by BFSI (+11.8%), Life Sciences (+19.0%), Travel & Hospitality (+18.2%) and Manufacturing (+10.7%) in constant currency. The company’s investments in building high impact digital platforms is also paying off, with 15.5% of total Q1 2016 revenues coming from Digital. In terms of key markets, growth in Q1 2016 was led by Europe (+3.6% quarter over quarter and +10.3% year over year) and North America (+2.4% quarter over quarter and +11.7% year over year) in constant currency. Net income for TCS in Q1 2016 was US$938 million, up 1.3%  quarter over quarter and 51% year over year. 

 

1. The Global ISG (Information Services Group) Outsourcing Index, May 2016
2. The Global ISG (Information Services Group) Outsourcing Index, Jan 2016