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Asia's outsourcing deals shrink in size

Contracts are also less complex, with specialist service providers tipped to gain most in a trend that is already rippling across the globe.

Smaller, less complex outsourcing deals are being signed in the Asia-Pacific region, following a global trend which spells opportunities for specialist service providers.

According to the latest quarterly report by consultancy firm TPI, the average value of outsourcing contracts awarded in the third quarter in the Asia-Pacific region was US$159 million. This is a significant drop, compared to US$293 million a year ago.

In fact, the average value of contracts awarded in the region for the first three quarters of 2005 is US$124 million, down by over 51 percent from US$255 million over the same period last year.

"This is a global trend, and it is also being felt in Asia-Pacific," said Duncan Aitchison, TPI's managing director.

Worldwide, the average value of larger contracts signed to date is 183 million euro (US$218 million), down 24 percent from 240 million euro (US$286 million) a year ago. In Europe, the average contract value also fell--by 37 percent--compared to the first three quarters in 2004.

Organizations' preference for smaller deals is also reflected in the decreasing number of mega deals that were signed this year. Only eight such deals, worth over 800 million euro (US$954 million), have been inked to date, compared to 13 over the same period last year, according to TPI.

The consulting firm attributed this trend to three key factors. First, the impact of price competition; second, a typically lower capital component since contracts are less likely to involve the transfer of assets to the vendor; and third, a growing preference for specialist providers.

According to Aitchison, service providers today are less inclined to leverage their balance sheets as a tool to seal outsourcing service agreements. "They (service providers) believe the responsibility for the financing of capital assets, ought to be the remit of the party who is most directly responsible for the utilization of those assets," he explained.

"With few exceptions, today's outsourcing practices are (about) delegating responsibility for a partial scope of a business process or function," he added. "It is therefore insufficient to align the capital and operational responsibilities with one party."

Taking control
Another factor that has resulted in deals with lower capital component is the company's preference to maintain better purchasing control.

"(Lower capital intensity) is being driven by increased regulation and market scrutiny of outsourcing deals that can impact a service provider's stock value. Clients are choosing to handle capital requirements through their own channels rather than through service providers," Aitchison noted.

TPI's data also revealed that in the past two years, 80 percent of deals have focused on a single process or function, compared with only 65 percent three or four years ago. Businesses that are choosing to outsource single functions, such as accounts payable or desktop support, are selecting a "best-of-breed" provider for each function.

This preference for specialized vendors is benefiting a wider range of providers and driving increased competition. "The pain of (fighting for) a smaller market is being felt across all geographies," said Aitchison. "However, the fact that this smaller pie is being divided into smaller pieces represents an increasing opportunity for (various) service providers (to be part of the same deal)."

Indian providers, in particular, are enjoying growing success. "As the recent ABN Amro deal demonstrates, Indian providers are also now competing for and winning the biggest application development and maintenance contracts," said Aitchison. India-based Tata Consultancy Services, Infosys and Patni Computer Systems, along with IBM and Accenture, won parts of the US$2.2 billion deal to provide the Dutch bank with IT services over five years.

TPI's latest report also showed a rise in use of offshore locations. Forty-four percent of contracts signed worldwide in the first three quarters of this year involved offshore components, up from 40 percent in 2003 and 2004.

More BPO (business process outsourcing) than ITO (IT outsourcing) deals today have offshore components--a reversal of the norm in previous years. "It seems that BPO clients are becoming increasingly comfortable with work being performed by offshore providers," said Aitchison.