Asia's outsourcing activities slow down

After clocking disappointing US$2.3 billion worth of outsourcing deals in first-half 2010, Asia-Pacific will need to secure contracts worth US$8.7 billion in second-half of 2010 to match last year's figures, finds new report.
Written by Swati Prasad, Contributor

The lack of mega outsourcing deals and contracts valued over US$200 million has significantly reduced total contract value (TCV) levels in the Asia-Pacific region in the first half of the year.

According to the TPI Index Asia-Pacific, the value of contracts awarded in the first half of 2010 was only to the tune of US$2.3 billion, compared to US$3.1 billion and US$5.5 billion for the first half of 2008 and 2009, respectively.

TPI said the traditionally strong vertical markets of financial services, telecom and media and manufacturing had proven weak this year. The region will need strong results in the remaining months of 2010, particularly in securing mega deals and contracts worth over US$200 million, to hit the US$11 billion mark and be on par with last year's figures. Mega deals or relationships have annualized contract values (ACVs) of over US$100 million.

Michael Rehkopf, partner and director of North Asia at TPI, said in a conference call Wednesday: "In order to reach 2009 level, the industry will require a record US$8.7 billion TCV in the second half of 2010."

The TCV was also below the average value US$3.79 billion for the last 10 years.

The disappointing result was largely due to a drop in deals valued over US$200 million that were signed in the region. In fact, only one contract of that value--involving a top five European provider--was inked in the first half of this year, according to TPI.

Some 83 percent of total contracts awarded were worth less than US$100 million compared to 71 percent in the whole of 2009, 72 percent in 2008 and 64 percent in 2007.

IT outsourcing, specifically, saw a considerable drop and will need US$6.6 billion in TCV and 43 new contracts in the second half of 2010 to match the levels of 2009, which saw nearly 70 contracts inked with TCV of US$8 billion.

"The Asia-Pacific market is very volatile and several deals have been put on hold," Rehkopf said, but added that the market could still bounce back.

According to TPI, 18 business process outsourcing (BPO) contracts were signed in the first half of 2010, or nearly 80 percent of last year's figures. Another 10 deals will seal 2010 as a new record in the region for the number of BPO contracts, though contracts inked so far have been relatively small in terms of TCV.

TPI added that telco-to-telco contracts continued to fuel the emerging domestic outsourcing market in China and India.

In terms of market share of TCV, Australia and India led the region. India accounted for 32 percent of the overall TCV, excluding mega contracts, while Australia clocked in at 42 percent.

Cloud discussions ongoing
Despite the sluggish results, businesses are investigating solutions such as cloud computing for near-term impact, according to TPI which surveyed over 140 corporate IT decision-makers globally about their plans for cloud computing.

The study revealed that respondents indicated need to separate hype from reality, as many believed there was still a lot of noise regarding the cloud.

"Clients are concerned about a number of risks involved with moving to the cloud, with data security being their biggest concern," said Kevin Smilie, TPI's partner of CIO services.

The survey further revealed that 18 percent of respondents were already engaging service providers in discussion regarding their cloud offerings, while another 45 percent said they would do likewise over the next six months.

"Cloud computing may still be regarded as hype, but our research indicates it is top of mind with both providers and clients today," Smilie said.

Swati Prasad is a freelance IT writer based in India.

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