Software services


Market analysis

ISG (Information Services Group), a technology insights company, said that global outsourcing activity rose sharply in Q4'13, even as contract values fell as part of a trend toward smaller deals. Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of US$5mn or more, showed the number of contracts awarded during Q4'13 climbed by 13%, while ACV dropped 12%, to US$4.6bn. For the full year, the number of awards edged up 2%, but values fell 18%, to US$18.7bn. In all, 309 contracts were awarded in the fourth quarter, while 1,155 contracts were awarded for all of 2013, both in line with the totals of the previous two years. ISG attributed the drop in value to a number of factors, among them a fall-off in the number of “mega relationships” (those with ACV of US$100mn or more); a sharp decline in activity within the Manufacturing sector and, to a lesser extent, Financial Services; and weakness in business process outsourcing (BPO).

For the year, areas of particularly strong deal activity were contract restructurings, up 22%, as more enterprises converted long-term deals with a single supplier into shorter-term contracts with multiple providers. Information technology outsourcing (ITO) increased significantly (up 8%), especially in the applications development and maintenance (ADM) space; and the EMEA region, which saw contract counts jump 18%.

Across industries, the Manufacturing sector saw the steepest drop in value, with ACV of more than US$2bn from the prior five-year average and 47% for the year. Financial Services was down 15%, but was flat with its five-year average ACV. Travel, Transport and Leisure, on the other hand, saw its ACV climb 56% in 2013, while the Energy and Healthcare and Pharmaceutical sectors recorded slight gains.1

According to the ISG Outsourcing Index for Asia Pacific, ACV totaled US$1bn for the second half, same as the US$1bn recorded in the first half. Full-year ACV of US$2bn was down 80% from the standout year of 2012, but consistent with prior years. Similarly, the total number of contracts for the year, 126, was down from 2012 but broadly in line with the volume of contracts in the 2009-2011 period. The volume of activity did, however, pick up in the second half of 2013, as the number of deals rose 7% compared with the first six months of the year. Last year, only three contracts valued between US$40mn and US$99mn were awarded, compared with 12 in 2012. Most Asia Pacific contracts fell into the US$5mn to US$39mn range, but the number of those contracts, like that of the large-scale deals, were down for the year.

Although 2013 pales in comparison to 2012, it was more truly representative of the long-term trend in the region. Indeed, the value of both mega deals and sub-US$40mn contracts in 2013 were in line with their five-year averages.

Clearly, deal value is getting smaller, as clients take advantage of lower service costs and increased competition, while moving toward multi-sourcing environments. The work that was awarded to a single vendor in the past is now being split up among multiple service providers offering specialised capabilities.1

Cognizant’s revenue for the fourth quarter of 2013 rose to US$2.36bn, up 20.9% from US$1.95bn in the fourth quarter of 2012. GAAP net income was US$324.3mn, or US$1.06 per diluted share, compared to US$278.8mn, or US$0.92 per diluted share, in the fourth quarter of 2012. Diluted EPS on a non-GAAP basis was US$1.15, compared to US$0.99 in the fourth quarter of 2012. This was led by higher demand growth from rest of Europe (ex. UK) segment and also improvement in operating margins.

TCS reported revenue of US$3.44bn, an increase of 17% YoY. International revenues grew 3.8% in dollar terms sequentially. Net income was US$858mn up 31.7% YoY. This was due to strong international demand for the company’s services. In terms of market segments, TCS witnessed a surge in demand from its MEA (Middle East Europe) market. In terms of business segment, Media & Entertainment showed the highest growth in demand of 43.6%.

  1. The Global ISG (Information Services Group) Outsourcing Index, January 2014
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Mark McCaffrey
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