A horrible quarter for outsoucing deals in EMEA

(By Anthony Miller) The quarterly round-up of outsourcing deals from sourcing advisors, TPI (see TPI Index), very much mirrored the mood set in Regent's M&A report (see Regent reports declining European tech M&A), i.e. 3Q08 was a bit of a bummer. To be sure, 3Q is traditionally the weakest quarter in normal times, but these are not normal times - in fact there were no outsourcing mega-deals (TCV > €800m) at all in EMEA in the quarter and the Americas region outperformed EMEA in TCV for the first time in nearly two years.

The finger was clearly pointed at the Financial Services sector, where Banking TCV (total contract value) tanked over 60% ytd, dragging average FS TCV down 37%. Yet TPI expects strong outsourcing activity in Q4 based on their knowledge of negotiations that started well before the financial markets crisis hit home. The corollary, of course, is that they (and we) expect deal flow to slow in 2009 - though in my opinion, not just in FS; I think the malaise will spread to other sectors too. The deals most likely to proceed are those where the supplier is putting big dosh on the table up front, like TCS's recent acquisition-cum-outsourcing deal at Citigroup (see TCS scores largest ever Indian deal) - not rocket science, I know. This, as TPI so rightly points out, favours vendors with strong balances sheets, healthy cash piles and/or access to funds, a club whose membership is becoming increasingly smaller! In any event, TPI sees clients more and more taking a holistic look at IT costs, rather than on a unit price basis, hence moving away from traditional staff augmentation contracts towards output-driven managed services deals. This is not good news for body shops!

On the brighter side, TPI reported a still healthy German outsourcing market, including FS, and this also seemed to be the case for central Europe in general. Personally, I think this is just a 'lag' effect, and where US/UK outsourcing goes, Europe is likely to follow.

On the vendor front, TPI noted clear signs of a customers consolidating their preferred supplier lists. Just five years ago, there were only 14 vendors that scored five or more outsourcing contracts; that list has expanded to nearly 30 vendors, suggesting that many of the smaller players have simply been squeezed out. By the way, five years ago the list did not include a single Indian player; now over 25% of the list are Indian. TPI made the point that from the clients' perspective the issue was not so much whether the vendor was Indian or not - it was more about whether they had offshore delivery capability. We agree on the offshoring bit, but it seems to me the Indian players are certainly gaining share in Europe, particularly as they gain credibility in infrastructure management. In fact TPI noted anecdotally that Indian players were increasingly being invited to the table for IM deals but they haven't yet seen a corresponding increase in wins. I would imagine the Indian players are being used as stalking horses to drive down traditional vendors' pricing - and they know this, of course. But I am equally sure that not only will they be invited to the table, eventually - and sooner rather than later - they will be asked to take a seat at it too!