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Market analysis

The global outsourcing industry remained on pace to achieve double-digit growth for 2014, despite a weak third quarter. Commercial outsourcing contracts with annual contract value (ACV) of US$5mn or more show that year to date ACV is up 13% to US$17.1bn, fueled by double-digit increases across most regions, service areas and contract types and sizes. Year-to-date contract volume is up by 4%.

In Q3’14, however, ACV declined by double digits in virtually every geography and segment, as the global market paused from an accelerating first-half that saw ACV top US$6bn in each of the first two quarters. Compared to a strong third quarter in 2013, global ACV was down 21%, to US$4.6bn, while the number of contracts signed dropped 32%, to 239 in the third quarter. The Q3’14 declines in ACV and in contract volume were driven by a decline in both new-scope and restructured deal activity. The number of mega-relationships (valued at over US$100mn) and smaller contract-value (valued at below US$40mn) declined noticeably.

Information technology outsourcing (ITO) was down 23% from the prior year, largely because of the decline in new-scope contracts. The fluctuating business process outsourcing (BPO) market also declined globally, albeit by a smaller amount, but rose in the Americas. The BPO market shifted away from horizontal back-office functions (sales, marketing, finance and R&D). It is now characterized by more sourcing in contact centers, facilities management and industry-specific work.

ACV in the Americas region was up 11% at US$1.9bn versus a soft third quarter in 2013, mostly due to large contracts in Canada and Brazil, even though deal count dropped by nearly 30%. The region’s year-to-date performance with ACV up by 18% was fueled by a sharp 30% increase in the value of new-scope contracts. ITO contracts increased by nearly 20% and BPO contracts increased by 17%.1

EMEA, the world’s largest outsourcing market, mirrored the broader market and saw declines in value and deal count versus a strong third quarter in 2013. But the region looks quite healthy from a year-to-date perspective, with growth in new-scope ACV (up 12%) and ITO ACV (up 14%). BPO value and contract counts, meanwhile, dropped by a third compared with the first nine months of 2013. Sourcing activity in EMEA continues to spread beyond the more mature markets of the UK and Europe, penetrating further in France, which saw sizeable awards in banking and transportation, and in Spain and Italy on the strength of activity in the automotive and financial sectors.1

Asia Pacific’s record-breaking pace in the first half slowed due to a lack of large-deal activity in the third quarter, as ACV fell 27% and deal counts shrank by more than 30%. As with other regions, the year-to-date picture in Asia Pacific is much rosier, with ACV up 60%, driven by growth in new-scope and restructured contracts, and ITO value that has reached a record high. Australia/New Zealand and Japan are doing the best thus far in 2014. ACV in New Zealand is up nearly 40% year to date, while Japan’s market value climbed almost 70%, primarily due to large awards in banking and manufacturing. China and India, meanwhile, continue their comeback years, with ACV in both markets far exceeding that of the previous year.1

Infosys reported Q3’14 revenues of US$2,201mn, quarter-over-quarter growth of 3% and year-over-year growth of 7%. This slow growth is in line with the overall outsourcing market which has slower growth in new contracts. Unlike its rivals, Infosys Ltd is cash rich as they have been conservative in chasing inorganic growth. But with new management it is slowly changing as the firm is considering acquiring a few firms with annual revenue in the US$600-700mn range.

  1. The Global ISG (Information Services Group) Outsourcing Index, Oct 2014

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