Demand for IT outsourcing jumps as public sector recession looms

The IT Outsourcing sector in Europe, Middle East, and Africa (EMEA) experienced a strong recovery in the final few months of last year, with continued signs of cautious optimism set for 2010, according to Duncan Aitchison, TPI president and partner.

TPI, the world's largest outsourcing advisory firm, this week published its quarterly report on the sector. The 4Q09 EMEA TPI Index, which tracks commercial outsourcing contracts valued at Euro 20 million or more, showed Total Contract Value (TCV) in the region hit Euro12.4 billion in the last three months of the year, an increase of 135% compared with the previous quarter and 61% year-on-year.

EMEA's strong performance in the quarter drove the global market and contrasted sharply with a modest sequential improvement in the Americas and a decline in Asia Pacific. Fourth-quarter TCV in the region was just shy of the level achieved in the second quarter of 2008, the last quarter before the downturn in the sourcing market began, and mega-deal TCV reached Euro 4.7 billion, the highest level in six quarters in EMEA.

However, as in other regions of the world, the strong quarterly performance was not enough to offset the effects of the global recession and the pause in outsourcing decision-making on full-year results. EMEA  - with Euro 29.3 billion of TCV for 2009 -  represented a 21% year-over-year decline and was the lowest annual total for the region since 2006. In the United Kingdom -  the world's second most mature outsourcing market after the United States -  full-year TCV fell by half from its 2008 level.

'There was a strong recovery for IT Outsourcing demand in the fourth quarter of 2009 after a slow start to the year  this increase was primarily driven by two mega-deals signed towards the end of the year, Aitchison explained to PublicTechnology.net. "Due to the economic climate, many businesses have been reluctant to embark on mega-deal partnerships, however recent activity indicates a growth of confidence in decision making within large corporations in Europe. As the broader economic picture begins to stabilise we are beginning to see larger businesses launching more strategic initiatives."

Looking to the year ahead, Aitchison commented that: "'Heading into 2010, the mood is one of cautious optimism for IT Outsourcing demand. Over the next 12 months we expect to see a steady increase in IT Outsourcing demand, however there are still delays in decision making and business confidence remains fragile.

"In terms of business attitudes, this year we expect many organisations to continue to place a heavy focus on reducing costs and capital expenditure. There has also been an increased interest in rationalising vendor relationships and applications. The potential impact of Coud Computing and the associated increase in the number of pilot initiatives in the market services arena is also climbing up the CIO sourcing agenda."

'TPI's research reinforces the NOA's 2010 outsourcing predictions,' said Martyn Hart, chairman of the National Outsourcing Association. 'While outsourcing was still seen as a viable cost cutting tool most budgetary pressure was put on suppliers in existing outsourcing relationships. Business leaders were loath to instigate new relationships with the often high upfront costs and governance investment that come with new outsourcing deals. This resulted in the slump in outsourcing mega-deals last year.'

In contrast to Aitchison, Hart believes 2010 to be a mixed bag for the sector. "2010 looks set to be a game of two halves," he said. "On one hand we see optimism rising in the private sector with companies using outsourcing to seize growth opportunities and re-skill with minimal risk. Many of those deals held-off by prudent procurers will also finally be implemented. On the other hand, however, we may see what amounts to a public sector recession wreaking havoc on those people and organizations in charge of public service delivery."

"The Tories threaten the end of big IT projects  while both them and Labour are likely to cut spending severely never mind who ends-up in power. Outsourcing and offshoring can and will be used positively in both sectors so we expect sizeable industry growth across the board."