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Market analysis

The global outsourcing market, comprising software services, information technology and business process outsourcing, delivered one of its best quarterly performances in Q4 2015, capping a year that saw a record number of contracts. However, as more enterprises revamp their processes around cloud, digitalization and automation, they are pushing for smaller contracts at lower costs. The shorter timelines and lower costs are in turn encouraging enterprises to restructure their older, more expensive contracts.

A total of 355 contracts were signed in Q4 2015, down 9% from 388 contracts in Q4 2014, but up by 3% compared Q3 2015. Annual Contract Value (ACV) during the fourth quarter stood at US$7.0 billion, the highest quarterly ACV in the last four years. ACV increased year over year by 5% and quarter over quarter by 25%, mostly due to nine mega-relationships (contracts with ACV of US$100 million or more) during the quarter.

For the full year 2015 the number of contracts reached a record 1,445, up 2% over 2014, even though 2015 ACV at US$23.7 billion, declined by 8%. The shortfall in ACV is largely due to the information technology outsourcing (ITO) market, which declined in annual value by US$2 billion - or 12% year over year - as more infrastructure moves to the more flexibly priced cloud environment.

New-scope contract ACV of US$3.4 billion in Q4 2015 was down 10% sequentially and 1% year over year. Restructured contract ACV was US$3.6 billion in Q4 2015, an increase of 110% sequentially and year-over-year increase of 10%. Mega-relationship contract ACV was up a staggering 162% sequentially and 43% year over year at US$2.4 billion.1

The Software Services subsector in Q4 2015 reported year-over-year revenue growth of 5.3% and quarter-over-quarter revenue decline of 6.5%. Year-over-year growth was primarily led by Cognizant (+18%) and Infosys (+9%).

In Q4 2015 Information Technology Outsourcing (ITO) ACV was up 55% sequentially and 15% year over year at US$5.5 billion. However, for the full year, ITO ACV declined 12% from 2014 at US$17.2 billion, mainly due to enterprises moving to cloud, digital and automation. This shift has driven the average ACV and contract durations to an all-time low. Business process outsourcing (BPO) ACV of US$1.5 billion was down 23% sequentially and 20% year-over-year as buyers continued to push for deals at lower values. However, full-year BPO ACV of US$6.6 billion was marginally up by 4% over 2014.

At 149 deals with an ACV of US$2.6 billion in Q4 2015, the Americas has now surpassed US$2.0 billion in ACV for eight consecutive quarters. However, ACV was flat in both the fourth quarter and full year owing to strong performance of the market in 2014, which was fueled by a buyer’s market in the Americas, a jump in mega-relationships, and a rise in contract restructurings.

The 687 contracts signed during 2015 was a new record, driven in part by a record 252 restructured contracts, valued at an all-time high of US$4.5 billion. ITO in the Americas during the year was pushed to record highs of 444 deals with an ACV of US$6.7 billion by application design and maintenance (ADM) work, which accounted for 52% of the region’s total ITO ACV for the year. 1

EMEA posted a strong finish to the year, with Q4 2015 ACV rising 17% to US$3.9 billion, fueled by the signing of five mega-relationship contracts. For the full year, however, a sluggish first half caused 2015 ACV to decline by 8% to US$11.7 billion and the number of contracts to decline by 7% to 601. The DACH market’s (Germany-Austria-Switzerland) ACV surged 69% to US$3.5 billion in 2015, aided by Siemens’ large renewal with Atos.

On 24th November 2015, CSC entered into an agreement to acquire UXC Limited, the largest independent and publicly owned IT services company in Australia. The deal is expected to close in February 2016.2 Also during Q4 2015, Computer Sciences Corp (CSC) separated its North American Public Sector business into the separate entity CSRA Inc., which in turn merged with SRA International, Inc.3 As a result of the separation, CSC’s Q4 2015 revenue of US$1.8 billion was down 36% sequentially over US$2.7 billion in Q3 2015. On year-over-year basis, revenue declined 10% over a revised revenue of US$2.0 billion in Q4 2014. Net income of US$43.0 million dipped 74% sequentially over US$167.0 million in Q3 2015. On a year-over-year basis, Q4 2015 net income was an improvement compared to a revised net loss of US$314.0 million in Q4 2014. The huge loss incurred in Q4 2014 was due to a US$195 million fine by the SEC over accounting irregularities.

 

 

1The Global ISG (Information Services Group) Outsourcing Index, January 2016
2BusinessWire, November 2015
3CSC.com, February 2016