Europe has overtaken the United States as the world’s leading market for new outsourcing contracts, according to the latest Quarterly Index from TPI, the international sourcing advisory firm.
TPI’s research reveals that in 2004 Europe represented 49 percent of the value of major outsourcing contracts (those worth over €40 million or $75 million) awarded worldwide, with the United States standing at 44 percent and Asia Pacific at 7 percent. The $53 billion of contracts awarded by European companies last year is more than double the value in 2002.
Duncan Aitchison, Managing Director, International with TPI commented: “The equalization between the European and US outsourcing markets comes through dramatic growth in Europe, not any significant decline in outsourcing in the Americas. European companies realize that they cannot continue to compete effectively on a global scale without utilizing the increased efficiency and flexibility they can gain through outsourcing.”
TPI’s research reveals that the value of major outsourcing contracts awarded last year was a record high of $109 billion worldwide. Of this, 67 percent was information technology outsourcing (ITO) and 33 percent business process outsourcing (BPO), whereby companies engage third parties to perform functions such as finance and accounting, procurement, customer relationship management and human resources processing. BPO expanded by 50 percent as a proportion of major contracts last year, from 22 percent in 2003.
TPI expects European outsourcing to increase yet again this year, with BPO to continue to gain in popularity and for ITO’s lead to gradually narrow.
“Big Six” share of global outsourcing market falls almost 40 percent
The increasing dominance of the European market in the global outsourcing scene is proving problematic for what has been outsourcing’s equivalent of the legal “magic circle”. TPI’s data reveals that the “Big Six” outsourcing providers - IBM, CSC, EDS, Accenture, ACS and Hewlett-Packard--have seen their collective market share fall by almost two fifths (38 percent) in 2004. They won only 44 percent of major contracts last year, compared to 71 percent in 2003. ACS is the only Big Six player to have increased its market share; HP’s market share is static. The other four main players have all experienced a significant fall.
The squeeze on the market share of the Big Six has been particularly severe in Europe. In ITO, they have seen a 51 percent decline in their market share from 73 percent in 2003 to 36 percent on 2004, compared to only a 25 percent fall in their share of the U.S. market, from 87 percent to 65 percent. Meanwhile, in BPO they have seen a 42 percent drop in Europe, from 21 percent to 12 percent, compared to no fall at all in the United States.
TPI says the Big Six are not maintaining market share in either ITO or BPO in the European market. The players that have done well in this space in 2004 are companies like Capgemini, Siemens, Xchanging and T-systems, each of whom signed over $5.6 billion worth of contracts during 2004.
“But the trend has not simply been a loss of market share by the Big Six in favor of a new group of ‘top’ suppliers, rather we are seeing an increasing diversity of providers,” says Aitchison. “This is partially driven by the growth of BPO, which is more likely than ITO to be sourced from several different suppliers performing different functions. In particular, we are seeing financial services, the largest and most mature market for outsourcing, becoming much more adept at using multiple service providers to fulfill their increasingly complex or specialized requirements,” he explained.
The Big Six’s dominance has also been eroded by a growing number of players proving that they are capable of winning the largest deals worldwide. The top hundred deals by value in 2004 were divided among 36 providers, compared to only 26 in 2003. The Big Six accounted for only 54 of the top 100 deals in 2004, compared to 68 in 2003.
76 percent of TPI led BPO deals now include offshore element--up 26 percent on last year
Despite the controversy that surrounds offshore outsourcing, 40 percent of the contracts awarded in 2004 on which TPI advised contained an offshore, or Global Service Delivery, element. Offshoring is a more common component in BPO than ITO contracts, with 76 percent of major BPO deals with which TPI was involved last year entailing at least some offshoring, up by more than a quarter from 56 percent in 2003.
More companies, particularly larger ones, are moving towards what is commonly known as “global service delivery” in which they buy services provided in several different locations internationally through a single contract. According to TPI data, among the contracts awarded in 2004 that involved global service delivery, 38 percent of the contract value moved offshore.
Germany reaches 12.5 percent of global outsourcing market--up 220 percent on 2003
The UK represented 20 percent ($21.7 billion) of the total worldwide value of major outsourcing contracts in 2004, and remains the largest country market for outsourcing after the US. However, outsourcing in Germany is expanding rapidly, and at 12.5 percent is the third largest country market. Just over $13 billion of major outsourcing contracts have been awarded by German companies in the last twelve months, a 220 percent increase on 2003 and 1000 percent on 2001. The leading providers in Germany are T-Systems, IBM, HP and Siemens.
German outsourcing is currently more dominated by ITO, with BPO representing only 25 percent of contracts awarded. Its largest market is manufacturing, representing 33 percent of contracts signed in 2004. TPI suggests that the German manufacturing industry, being very export-orientated and competitive, was quicker than other industries to realize outsourcing’s competitive advantages.
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