Is the outsource market at the evening of the next boom?

The stock exchange in Mumbai, India is in the middle of an impressive rebound (last week an average of 38% increase over the lowest point). As several large Indian outsource suppliers are stock listed in India does it imply that traders expect that the worst is behind us and that future earnings and revenue will grow. Similar trends can be seen in the U.S. and Europe which means that more stock traders believe the future looks bright than vise versa.

This bright future for the outsource market might however still be some quarters away as vendors still struggle to fill sales pipelines and close deals. That the, sometimes double digit, growth figures are something for the past and future show recent figures from Capgemini, Logica and Atos Origin. These companies have their gravity point within the U.K. Netherlands, Belgium and France and their revenue remained more or less flat during Q1 2009. Those companies which built a strong presence in government and healthcare can congratulate themselves as those where the mean area’s of growth and allowed to compensate for decreasing volumes in other verticals. Same story also for most of the vendors from India, also there flat or declining revenues. In India some vendors were even forced to layoff employees, the first the first time since the conception of their outsourcing industry.

Overall the outsource market declined however in Q1 2009, which is demonstrated by figures of advisory firm TPI. It relased information which shows that Europe, Middle East and Africa have experienced a decline in the value outsourced to external suppliers. The number of deals was still reasonably high, but the average contract value decreased. Companies are lowing the risk profile of their new engagements. See this post for a list of Do’s and Don’ts. Accordingly to TPI, the Total Contract Value (TCV) declined by 14 percent in Q1 2009 as compared to Q4 2008 in EMEA and the year over year decline was 44 percent. But there are also the first signs of recovery in the supplier market.

That the outlook for the near future is positive is demonstrated by Atos Origin which recently acquired Shanghai Covics Business Solution Ltd. (Shanghai Covics), a Chinese SAP consulting and systems integration vendor. Other vendors like, ACS was even able to grow during the last quarter. It recently announced that the revenues for the quarter ending March 31 2009 was $1,610m, a year-over-year increase of 4.4%. Even better figures from HCL Technologies. It announced Q1 2009 an 18.2% year-to-year growth, which are definitely figures that beat the market average, and show that there are still deals in the market.

I personally believe that the TCV of the outsourcing market will still remain flat for most of 2009 as most companies are still busy with internal restructurings and will avoid new complex outsourcing and transformation projects. When management attention gets freed up again and companies dare to take on more risk, also the big deals will become more prominent again.
Until then, vendors should for 2009 focus on a) winning the smaller deals, b) try to extent the scope of existing contracts and c) get exisiting contracts resigned. Retaining existing contracts should be one of the key objectives of vendors this year as getting a new contract is much more costly than retaining existing contracts.