Software services

 
 
 
Choose
benchmarks

Market analysis

The global outsourcing industry is off to a fast start in 2014, with the return of the “mega deal” fueling double-digit growth in Q1'14 contract value. Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of US$5mn or more, show 10 mega-contracts worth more than US$100mn in ACV were signed in the first quarter, marking a return to pre-recession (before 2008) levels. These large contracts, coupled with double-digit growth in overall contracting levels, fueled a 14% increase in ACV over Q1'13.

Global ACV of US$5.7 bn in the first quarter was generated, to a large extent, by new-scope contracts, whose value grew 41% YoY, to US$3.6bn. Growth was particularly strong in new-scope information technology outsourcing (ITO), both in terms of value and in the number of contracts awarded. As evidence of the move to smaller contracts, the number of contracts awarded in the US$5mn to US$9mn range this past quarter was up 21% YoY.

Restructured contracts continue to represent a substantial and growing portion of the market, at least in terms of deal counts, which were up 24% over the last 12 months. However, ACV continues to shrink as contracts are being awarded at much smaller values. ISG expects this trend to continue as multi-sourced contracts are themselves broken up, shared and delivered more efficiently in succeeding generations.

ITO was the biggest driver of first-quarter growth, with ACV up 29% YoY, principally the result of a number of large new-scope awards hitting the market in the first three months of 2014. Deal counts were essentially flat QoQ, but were up 15% over the trailing 12 months. The value of contracts for IT infrastructure outsourcing in the first quarter was nearly double the average over the prior eight quarters.1

Business process outsourcing (BPO) activity and values climbed significantly from the weak Q4’13 performance, but that spike is not substantial keeping in the mind the performance for the last 12 months, a period that saw ACV drop by 37%. Multi-process and facilities management outsourcing were two areas whose first-quarter values advanced well beyond their trailing eight-quarter averages. The relative volatility in the BPO market is being caused, in part, by fast-evolving technology solutions, such as SaaS and cloud, that are transforming the market.

By region, EMEA continued its steady, reliable growth in the first quarter, with ACV up 29%, to US$2.9bn, and contract counts up 21%, driven by new scope awards and strength in ITO. It was the 11th time in the last 14 quarters the region topped the US$2.5bn mark in ACV. Growth in the UK and the Nordics was particularly notable, as was strength overall in Travel, Transport & Leisure and Business Services, both of which easily eclipsed their average values over the previous eight quarters.1

CSC’s revenue for the quarter was US$3.33bn which is a decrease of 5% YoY. For the full year, revenue of US$13.0bn declined by 8% in constant currency basis. Operating income was US$359mn for the quarter, an increase of US$154mn YoY, and reflects progress made from cost takeout initiatives and higher restructuring in the year-ago period, as well as the benefit from a special item—a US$21mn reversal of contingent consideration associated with the acquisition of ServiceMesh, Inc. Income from continuing operations of US$179mn for this quarter decreased by US$68mn when compared with the year ago period due primarily to a tax benefit of US$144mn in the prior year. For fiscal 2014, income of US$621mn from continuing operations increased by US$123mn.

Cognizant’s revenue for Q1'14 rose to US$2.42bn, up 19.9% from US$2.02bn in Q1'13. GAAP net income was US$348.9mn. GAAP operating margin for the quarter was 19.0%.

TCS reported US$3.5bn, a growth in quarterly revenue of 15.2% YoY in Q1'14. There was holistic growth across markets and industries during the financial year. Europe led growth in major markets, while UK and North America continue to grow in line with the company average. All major industry verticals grew in double digits led by Retail, Manufacturing, Life Sciences & Healthcare and BFSI during FY14. Strategic investments, including those in Digital Technologies, are providing a compelling value proposition.

  1. The Global ISG (Information Services Group) Outsourcing Index, January 2014
Please click here to access the Data Explorer tool offering additional financial information on these as well as many more companies.
 
 
Contacts
Mark McCaffrey
Global leader
Software & internet
Tel: +1 (408) 817 4199