Global Outsourcing Industry changed significantly in 2012, continue to change in 2013

According to KPMG Global IT-BPO Outsourcing Deals Analysis, 2012 is a year when the global outsourcing industry recovered from a comparatively bad 2011 but it still has to regain the level of performance that the industry saw in the year 2010. The report also highlights Worldwide in 2012, 1,244 ITO contracts worth USD 118.3 billion and 226 BPO contracts worth USD 19.5 billion were signed and 120 IT-BPO Bundled deals were signed in 2012 with contract value worth USD 12.7 billion. The number of deals also has improved compared to 2011 but it did not reach the 2010 or 2009 levels which show that the industry is being affected by the European Sovereign Debt Crisis and the economic volatility in the United States. 2012 saw a healthy growth in terms of number of deals (9% YoY) and Total deal value (24% YoY).

Geographically companies in Americas dominate the outsourcing industry with TCV of US$ 95.8bn followed by Europe, Middle East & Africa with US$ 36.0bn and Asia Pacific with US$ 18.7bn. Europe has seen a fall in terms of deal value by 21% courtesy the ongoing European Sovereign Debt crisis which is having a significant effect of the Europe as a whole and most of the countries have been drastically affected by the crisis. Asia is also gaining as companies in most of the Asian countries are also outsourcing to cut costs and increase their profitability.

Most of the deals worth US$ 64.9bn are in the range between US$ 100mn – US$500mn but the companies are still doing big deals that are more than US$ 500mn but less than US$ 1bn with a TCV of US$ 50bn. But overall the contract values of the deals are coming down when the deals are coming up for renewals. Companies are renewing deals at a lower value than previously outsourced. Companies are looking for significant discounts in pricing for the renewal deals and are also changing the outsourcing vendors if necessary which is leading to vendor churn in the industry. Less than US$100mn deals are with a TCV of US$ 35.5bn.

The Deal tenure has also come down as in the initial stages of outsourcing most of the deals were signed for 7-10 years and this trend has changed in the last two years when most of the deals are being signed for tenure of 1-5 years and the TCV is US$ 96.9bn. Deals with tenure of more than 5 years are also being signed and the TCV is US$ 52 bn. The deal size which most of the companies are looking at is around 4-5 years and less than 1 year deals are very small.

Pricing too has seen a significant change where in most of the deals (97%) are based on Fixed pricing and Hybrid pricing. Hybrid pricing deals are more complex hybrid pricing structures that combine input based pricing, output based pricing, and occasionally business outcome-based pricing mechanisms. In fact Hybrid pricing deals have significantly increased in the last three years as companies want their outsourcing vendors to not only reduce cost but also provide them more value based and outcome based services that will directly affect their business outcomes.