While Gartner forecasts the worldwide IT Outsourcing (ITO) market to reach US$288bn in 2013, a 2.8% increase in U.S. dollars (and 5.1% in constant currency) from 2012, constrained IT budgets, an evolving ITO delivery model, economic conditions and cost-focused buyers are limiting the growth potential of the ITO market. Enterprise buyers pursuing hybrid IT strategies and small and midsize business buyers adopting infrastructure as a service (IaaS) are key drivers in cloud and data center service segment growth rates.1
According to the Global ISG Outsourcing index, which measures commercial outsourcing contracts with an annual contract value (ACV) of US$5mn or more, the ITO segment of the overall outsourcing market dropped sharply in Q2'13. ACV for the quarter (US$2.3bn) and number of contracts (126) both declined by 26% from Q1’13. Year-to-date performance of US$5.3bn was down 27% from the first half of 2012. New scope activity within ITO was US$1.7bn, which was on par with the prior quarter. ITO restructuring ACV, recording only US$600mn in the quarter, dropped by half to the lowest point since Q2’10. Traditionally strong industries lagged, with Financial Services down 41% from the previous quarter, while Telecom contracts dropped nearly two-thirds and Manufacturing fell by half.2
ITO in emerging Asia/Pacific, Latin America and Greater China markets will all grow more than 13% in 2013 and 2014. Expansion by multinationals into these regions, new buyers of ITO that are themselves growing organizations, and fertile economic conditions all drive the positive outlook. In North America, it is expected that buyers will seek to transition more IT work to annuity-managed service relationships for cost takeout and more predictability in IT costs. This will keep ITO growing in the region through 2016.2
In the last one year, the Software Services segment has performed better than most of the other technology sectors. The companies in the analysis reported a positive growth in revenue and net income in Q2'13 except for CSC. Higher costs and competition for contracts led to CSC’s disappointing performance. New business bookings for the quarter were down 33% YoY, and the book/bill ratio for the quarter was 94% which suggests that further revenue declines are likely for CSC.
The better than expected results of Infosys, HCL and TCS signaled a rise in demand for the Indian IT outsourcing providers' services. However, looming large over all Indian IT companies is the possibility that the US, the sector's biggest market, will implement as early as next year new visa rules that will make it more costly and difficult to send workers to the US.
During Q2'13, CSC announced a new reporting structure, whereby its former Managed Services Sector and Business Solutions & Services segments will be reported as Global Business Services and Global Infrastructure Services, respectively, to better align with its strategy of establishing an early market-leading position in next-generation technology solutions.
On May 26th 2013, CSC reached a definitive agreement with PAE for the sale of its Applied Technology Division (ATD), for US$175mn in cash. CSC acquired ATD with the 2003 purchase of DynCorp. Additionally, on May 21st 2013, CSC completed the divestiture of its flood insurance-related business process outsourcing practice to a financial investor for US$43mn in cash plus a net working capital adjustment receivable of US$4mn. These agreements further CSC’s transformation strategy to rebalance its portfolio of services by focusing on its core strength in next-generation technology solutions and services.
On June 28, 2013, Tata Consultancy Services Netherlands BV, a wholly owned subsidiary of Tata Consultancy Services Limited, acquired Alti S.A., an information technology services company in France, for US$83.7mn (€64.2mn) in cash.
Market cap for Software Services companies declined at the end of the quarter vis-à-vis the previous quarter. There are two negative factors weighing on the Indian IT sector which are driving down its share prices: pending approval of the US immigration bill and slowdown in discretionary spending.