(By Anthony Miller). As usual the excellent quarterly concall run by sourcing advisors TPI revealed a treasure trove of data points about the private sector European outsourcing market. The most startling point was the dramatic decline in European outsourcing megadeals (i.e. TCV>€800m) in H208 – there was just one, compared with 5 in H1 and 9 in H207. But even this didn’t stop average contract value (ACV) across the whole of 2008 reaching an all-time record of just over €14bn, nearly 10% up yoy. It seems pretty clear that large enterprises have all but lost their appetite for major outsourcing deals, instead breaking them down into smaller pieces with, we assume, quicker ROI. It doesn’t take a rocket scientist to realise, then, that the ‘big boys’ in the sector, like IBM, Accenture, HP/EDS, CSC, et al are going to have graze further afield for the next meal, and this will not be good news for the tier two players.
Neither will any of the usual suspects take much encouragement from the headway that the Indian pure-plays are making in Europe. TCS, Infosys and Wipro each scored 5 or more European outsourcing deals during the year, and Tech Mahindra, the offshore telecoms SI part-owned by BT, appeared in the European Top 15 by total contract value (TCV). But more tellingly, five of the top ten providers of AD&M (by TCV) are Indian SIs. By the way, this includes Satyam, so we may see a different mix in 2009! Similarly, ExlService, Genpact and Infosys all figure among the top F&A BPO providers in Europe.
The Indians are still waiting for the ‘breakthrough’ on the Continent, though. Germany is looking the best prospect, with TPI expecting more IT captives to be divested in exchange for major outsourcing deals. To be honest, we thought this would happen some years back when in quick succession ThyssenKrupp (Feb. ’04) and KarstadtQuelle (Sep. ’04), and then some time later, Volkswagen (Jan. ’06), all sold off their IT businesses to major players (HP, Atos, T-Systems respectively). May be the current downturn will cause the dam to burst. If so, it seems improbable to believe the Indians (dare we call them The Dambusters?) would not get their fair share of the spoils, if not more. Meanwhile, France still remains ‘difficult’ – now, who would believe that? Otherwise, TPI is not expecting the Mumbai terrorist attacks nor the Satyam accounting scandal to have a lasting impact on the Indian offshore sector – and I would agree.
You can only surmise from TPI's findings that the first half of this year is going to be light on major outsourcing deals, but I think we’re talking more about size than number. This should open the opportunity to a wider supplier market, though of course customers will be even more diligent to select their vendor based on financial stability and corporate governance than ever before.