Outsourcing contracts down by 19%, says researcher

IDG News Service - The number of new IT and business process outsourcing contracts worldwide dropped year-on-year in the third quarter, with contract values also decreasing, a research firm said.

Everest Group, which had reported a drop of 20% year-on-year in the second quarter, said the number of contracts was down to 381 in the third quarter from 472 in the same quarter last year.

The dip in number of contracts in the third quarter is more worrying than the slowdown reported in the second quarter, because the third quarter is usually the busiest period in the outsourcing industry, said Salil Dani, practice director for global sourcing at Everest, on Tuesday.

The drop came largely because of economic problems in key markets like the U.S. and Europe, but there was also uncertainty about offshoring among U.S. customers, as keeping jobs in the country became a key issue in the U.S. presidential election campaign, Dani said.

Banks in the U.S. in particular delayed decisions relating to offshoring to locations like India and the Philippines because a number of them have taken funding from the government, and didn't want to be seen as offshoring while the political rhetoric was at its hottest, Dani said.

Offshoring is a key part of outsourcing, and about 47% of the contracts in the quarter had an element of offshoring. About 38% of the contracts were for delivery from India and other locations in Asia, he added.

Everest said its estimate of outsourcing contracts is based on publicly disclosed data, and included entirely new transactions as well as some renewals of earlier deals. Dani said that if estimates of contracts that were not made public were included, the numbers of new contracts were still lower in the third quarter than from the same quarter a year earlier.

The total annualized value of new reported contracts has also been falling, particularly in business process outsourcing, and was down to US$1.5 billion in the third quarter from $2.7 billion in the same quarter last year, Dani said. Annual contract value is the value of a contract divided by its duration. The deal sizes are getting smaller across most industry verticals, he added.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com