November 09, 2011, 10:42 AM — The IT outsourcing market saw its first substantial decline in twelve months during the third quarter of this year. Transaction volumes fell for both the IT and business process outsourcing (BPO) markets, by seven percent and 12% respectively, according to the outsourcing consultancy Everest Group's quarterly report on the global services industry. The average contract value of BPO transactions plummeted by 50%, while the average contract value for IT contracts increased by 14%, thanks largely to three billion-dollar plus deals signed during the quarter.
"The global outsourcing and offshoring market is beginning to show signs of slowing growth in selective areas, but we'll need to see a few more quarters to determine if this is the beginning of a downturn trend," says Eric Simonson, Everest's managing partner of research.
Despite a decline in activity, Simonson remains cautiously optimistic in the medium term, given the level of new location activity by service providers. IT service providers opened 32 new outsourcing delivery centers in the third quarter compared to 17 the previous quarter. HP led the way by announcing ten new locations, followed by Dell, which announced four. Convergsys, IBM and Tech Mahindra each announced three new centers.
A second downturn in the economy-the so-called double dip effect-could have a big upside for outsourcing providers.
More than 40% of corporate IT leaders said that a double-dip recession would lead to increased outsourcing in their organizations, according to an October survey conducted by outsourcing analyst firm HfS Research. Another 46% said a second downturn would result in layoffs.
HfS Research also surveyed outsourcing providers and analysts and found that 61% of providers and 44% of advisors said their revenues would increase over the next six months if the economic situations worsens. Just 16% of advisors and six percent of providers said revenue would decrease. One-fourth of advisors and 21% of providers said revenue would remain the same, while 15% of advisors and 11% of providers said it's too early to tell what will happen with their revenue.
Corporate IT organizations may have no choice but to look for help outside their organizations if the financial situation continues to deteriorate. They made so many cuts in the previous downturn-in some cases to the bone-that outsourcing might be the only option for further productivity gains, according to HfS Research founder Phil Fersht.