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ISG Outsourcing Index: Return of the Mega Deal Gets 2014 Off to Strong Start

Ten contracts valued at more than $100 million pace growth in return to pre-recession average;

STAMFORD, Conn., April 10, 2014 /PRNewswire/ -- The global outsourcing industry is off to a fast start in 2014, with the return of the "mega deal" fueling double-digit growth in first-quarter contract value, according to the latest data from Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company.

Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show 10 mega-contracts worth more than $100 million in ACV were signed in the first quarter, marking a return to a typical pre-recession (before 2008) quarterly level.  These large contracts, coupled with double-digit growth in overall contracting levels, fueled a 14 percent increase in ACV over the 2013 first quarter.

Global ACV of $5.7 billion in the first quarter was generated, to a large extent, by new-scope awards, whose value grew 41 percent year-over-year, to $3.6 billion.  Growth was particularly strong in new-scope information technology outsourcing (ITO), both in terms of value and in the number of contracts awarded.

"Market value this quarter is clearly being driven by the return of the mega-relationship, but the longer term trend still points to a market dominated by an increasing number of smaller contracts, with a few large deals mixed in here and there," said John Keppel, president and partner of ISG.  "The first-quarter numbers, at first blush, might be a cause for industry euphoria, but a more sober view emerges when we analyze performance for the trailing 12 months.  ACV in that period was down 11 percent from the prior 12-month period, yet the number of contracts awarded for the most recent 12 months – 1,183 – is at an all-time high.  That seems to indicate that enterprises are continuing to opt for the greater flexibility and more specialized service that come with smaller, shorter contracts awarded to a greater number of providers.  Multi-sourcing, increasing competition among providers, and lower technology costs will continue to be the factors that drive the market for the foreseeable future."

As evidence of the move to smaller contracts, the number of contracts awarded in the $5 million to $9 million range this past quarter was up 21 percent from the 2013 first quarter.

Restructured contracts continue to represent a substantial and growing portion of the market, at least in terms of deal counts, which were up 24 percent over the last 12 months.  However, ACV continues to shrink as contracts are being awarded at much smaller values.  ISG expects this trend to continue as multi-sourced contracts are themselves broken up, shared and delivered more efficiently in succeeding generations.

ITO was the biggest driver of first-quarter growth, with ACV up 29 percent from last year, principally the result of a number of large new-scope awards hitting the market in the first three months of 2014.  Deal counts were essentially flat quarter over quarter, but were up 15 percent over the trailing 12 months.  The value of contracts for IT infrastructure outsourcing in the first quarter was nearly double the average over the prior eight quarters.

Business process outsourcing (BPO) activity and values climbed significantly from the weak fourth quarter of 2013, but that spike belies an overall anemic performance for the trailing 12 months, a period that saw ACV drop by 37 percent.  Multi-process and facilities management outsourcing were two areas whose first-quarter values advanced well beyond their trailing eight-quarter averages.  The relative volatility in the BPO market is being caused, in part, by fast-evolving technology solutions, such as SaaS and cloud, that are transforming the market.

By region, EMEA continued its steady, reliable growth in the first quarter, with ACV up 29 percent, to $2.9 billion, and contract counts up 21 percent, driven by new scope awards and strength in ITO.  It was the 11th time in the last 14 quarters the region topped the $2.5 billion mark in ACV. Growth in the UK and the Nordics was particularly notable, as was strength overall in Travel, Transport & Leisure and Business Services, both of which easily eclipsed their average values over the previous eight quarters.  France stood out as well, boosted by several large transactions for network and application development and maintenance outsourcing.

In the Americas, the market rebounded from a dismal fourth quarter to post its highest ACV, $1.9 billion, in the last four quarters, although year-over-year and trailing 12-month comparisons are not as rosy.  ACV dropped 24 percent over the last year, while the number of contracts declined modestly.  For the quarter, the ACV of restructured and BPO contacts both rose sharply, while new scope was largely flat and ITO deals fell 8 percent.  By industry, financial services saw a significant increase in ACV, supported by a number of BPO transactions, while Retail and Business Services grew quarter-over-quarter and year-on-year.

Asia Pacific, meanwhile, had its best quarter in nearly two years, with a number of mega-relationships driving extraordinary gains in both restructuring and new-scope ACV.  The annual value of ITO contracts spiked 80 percent, helped by large deals and overall robust contracting activity.  Australia/New Zealand, India and Southeast Asia all recorded triple-digit gains in ACV, while Manufacturing , Telecommunications & Media, and Travel & Transport were the industry sectors that saw the largest ACV gains.

In addition to its traditional look at commercial outsourcing, ISG this quarter also reported on the performance of the global public sector outsourcing market.  According to ISG research, the public sector represents 64 percent of the global outsourcing market, outpacing the commercial sector both in terms of global share and average contract size.  ACV for the trailing 12 months totaled $35 billion, up 30 percent over the previous 12-month period, with the ACV of ITO about four times as large as that of BPO.  Growth is expected to continue as government entities, in the face of leaner tax rolls and greater demand for services, increasingly leverage technology to deliver those services more efficiently.  In particular, an upheaval in the U.S. healthcare market, including a heightened attention to cost control, is creating unprecedented opportunities for sourcing activity in both the commercial and public sectors.

"The year is off to strong start, thanks in large measure to the reappearance of the mega-relationship and a surge in new-scope ITO awards," said Keppel.  "That bodes well for both the first half and the full year.  We now expect at least 15 percent ACV growth in the first half, and high single-digit growth for the full year.  There is quite a bit of activity now in the industry pipeline, and we believe the number of contracts likely will continue to grow at a faster pace than ACV, particularly as many second-generation contracts are renewed and restructured in multi-sourced environments."  

Now in its 46th consecutive quarter, the ISG Outsourcing Index provides a quarterly review of the latest sourcing industry data and trends for clients, service providers, analysts and the media.  For more than a decade, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance.

The 1Q 2014 ISG Outsourcing Index was presented during a conference call and webcast for media and analysts today.  To listen to an audio replay of the call and view presentation slides, please visit http://www.isg-one.com/web/research-insights/isg-outsourcing-index/.

About Information Services Group
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience and global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 850 employees and operates in 21 countries.

For additional information, visit www.isg-one.com.

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