More Outsourcing Buyers Opting to Restructure Contracts

3Q10 Global TPI Index shows delay in overall outsourcing market's gradual recovery due to continued weakness, uncertainty in global economy

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TPI

Oct 21, 2010, 10:39 ET

HOUSTON, Oct. 21 /PRNewswire/ -- TPI, the largest sourcing data and advisory firm in the world and a unit of Information Services Group, Inc. (ISG) (Nasdaq: III), an industry-leading information-based services company, released data today showing a sharp increase in outsourcing contract restructurings but a delay in the overall outsourcing market's gradual recovery due to continued weakness and uncertainty in the global economy.

The 3Q10 Global TPI Index, which measures commercial outsourcing contracts valued at $25 million or more, recorded total contract value (TCV) of about $14 billion, down more than 20 percent from both the previous quarter and the same period last year. While market activity typically slows in the third quarter, this year saw the lowest third-quarter TCV in five years.

Restructuring activity, which includes renegotiations, renewals and extensions of existing outsourcing contracts, totaled $6.8 billion during the third quarter, or 48 percent of the global market. Year to date, restructurings have accounted for 34 percent of overall TCV, compared with typically about 20 percent over the past three years, and have increased 56 percent over 2009, influencing results throughout the outsourcing market.

The uptick in restructuring activity can be attributed to three factors in the market:

Economic conditions have caused many companies to be tentative about new outsourcing adoption.
Existing outsourcers are increasingly attracted to the quicker returns and lower risk promised by restructurings.
Longer-term contracts – the 7- to 10-year agreements awarded in the early 2000s as well as the 3- to 5-year contracts typically awarded more recently – are now coming up for renewal at the same time.

"As we predicted earlier this year, 2010 is shaping up to be a year driven by restructuring of contracts as organizations look to identify opportunities for cost reduction and greater efficiency," said John Keppel, Partner and Managing Director, TPI Research, Analytics and Intelligence. "We expect to see restructurings continue to be a significant organic force in the outsourcing market in the future."

Now in its 32nd consecutive quarter, the TPI Index provides a quarterly snapshot of the sourcing industry for clients, service providers, analysts and the media. It is the industry's authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider metrics.

Third-quarter outsourcing market performance varied substantially by scope, region and industry sector, the TPI Index found.

By scope, contract awards in both IT outsourcing (ITO) and business process outsourcing (BPO) declined in the third quarter. ITO values have dropped off since a strong first quarter, resulting in flat TCV year-to-date. BPO contracts also fell from the previous quarter, and year-to-date TCV awarded in that scope is down 15 percent. About one-third of the BPO TCV awarded so far in 2010 has been restructuring-related, an indication that this younger segment of the market is now maturing.

By region, differing outsourcing market maturity and economic climates are playing a major role in whether companies decide to enter into new contracts or choose instead to restructure existing agreements. Contract values declined in both the Americas and Europe, the Middle East and Africa (EMEA) during the third quarter, though the data indicate some stabilization in EMEA.

Among the industry sectors that historically have driven overall outsourcing market performance, Financial Services saw substantial contract award activity in the third quarter, largely due to the restructuring of some EMEA-based contracts with TCV of more than $1 billion. However, Manufacturing and Telecom & Media continue to recover at a slower pace.

"After some growth in the early part of the year, global outsourcing market activity in the third quarter slowed considerably," said Keppel. "However, we do anticipate a significant improvement in performance in the fourth quarter even with the sluggish economy."

TPI will conduct a conference call today at 11:00 a.m. Eastern to discuss the results of the 3Q10 Global TPI Index. To learn more, listen to a replay or view slides from the presentation, please visit http://www.tpi.net/knowledgecenter/tpiindex/.

About TPI

TPI, a unit of Information Services Group, Inc. (ISG) (NASDAQ: III), is the founder and innovator of the sourcing advisory industry, and the largest sourcing data and advisory firm in the world. We are expert at a broad range of business support functions and related research methodologies. Utilizing deep functional domain expertise and extensive practical experience, our accomplished industry experts collaborate with organizations to help them advance their business operations through the best combination of business process improvement, shared services, outsourcing and offshoring. In 2010, the International Association of Outsourcing Professionals ranked TPI no. 1 in its Global Outsourcing 100: World's Best Outsourcing Advisors. For additional information, visit www.tpi.net.

About Information Services Group, Inc.

Information Services Group, Inc. (ISG) (NASDAQ:III) was founded in 2006 to build an industry-leading, high-growth, information-based services company by acquiring and growing businesses in advisory services, including strategy, implementation and management, and market information, including market measurement, analytics and related product and services. In November 2007, the company acquired TPI, the largest sourcing data and advisory firm in the world. Based in Stamford, Conn., ISG has a proven leadership team with global experience in information-based services and a track record of creating significant value for shareowners, clients and employees. For more, visit www.informationsg.com.

SOURCE TPI