By Dan Berthiaume
Global BPO total contract value (TCV) trends recorded during Q2 2012 show that demand for BPO services remains high worldwide. As reported in the newly released ISG TPI Index for Q2 2012, quarterly BPO TCV (for contracts worth more than $25 million) reached $8.3 billion.
This figure is up 7% from $7.8 billion in Q2 2011 and represents a substantial 32% increase from $6.2 billion the prior quarter. It also includes value from “megadeals” (contracts with TCV of $1 billion or more) of $2.5 billion. However, global BPO TCV performance during the first half of 2012 was not as impressive. TCV totaled $14.6 billion, down 13% from $16.7 billion in the first half of 2011 but higher than first half TCV performance in 2010 ($12.2 billion) or 2009 ($13.1 billion).
Smaller BPO Contracts Grow at Faster Pace
ISG data shows that the broader BPO market (TCV of more than $25 million) accounts for most global BPO revenue, but the biggest growth is occurring in the segment of the BPO market where TCV totals are $25 million or less. Current annualized revenue for the broader BPO market is $28.8 billion, 91% of total annualized BPO revenue of $31.6 billion and up 30% from $20.8 billion in 2007. Meanwhile, the annualized revenue of smaller BPO deals only totals $2.8 billion, or 9% of total annualized revenue, but this figure is up 148% from $1.1 billion in 2007.
In terms of active contract counts, there are 1,731 BPO contracts worth more than $25 million, 64% of 2,707 total. But while there are only 976 contracts worth less than $25 million (36% of the total), this figure is up 124% from 436 in 2007. In that same time period, the total number of BPO contracts worth more than $25 million has risen 72% from 1,008. In terms of growth by specific type of BPO contract, industry-specific (17.9%) and financial services (13.1%) contracts had the highest 12-month growth rate. Procurement contracts experienced slightly negative growth (-0.8%), while human resources and contact center contracts grew by an identical 2.3% year-over-year and F&A contracts grew by 1.1%.
Outsourcing in General Has Good Quarter
Overall, Q2 2012 was healthy for global outsourcing in general (including ITO contracts), with a TCV of $21.4 billion, up 7% both quarter-over-quarter and year-over-year. However, during the first half of 2012 the global outsourcing market showed some weakness, with a TCV of $41.4 billion representing an 8% year-over-year drop. Some of the quarter-over-quarter growth was driven by an increase in “megadeals” worth $1 billion or more; there were five in Q2 2012 worth $6.3 billion, but only one worth $1.5 billion in Q1 2012. Megadeal trends since 2009 show there tend to be more contracts of this size signed in the second quarter of the year than the first.
Outsourcing Contracts Get Shorter
ISG also reports a second quarter trend of outsourcing contracts across the BPO/ITO spectrum getting shorter in duration. The average outsourcing contract signed during the first half of 2012 averaged 4.85 years in length, compared to a three-year average of 5.1 years from 2009-2011 and a two-year average of 6.4 years from 1999-2000. Looking specifically at duration trends in BPO contracts, ISG finds the average BPO contract in 2009 had a 5.4-year duration, which has already declined 12% to 4.8 years in the first half of this year. ISG ascribes this trend to three primary driving factors: competition among an increasing number of providers leading to shorter contracts to help “seal the deal,” solution improvements enabling the delivery of the best solutions at the best prices available via more frequent contract negotiations, and a general trend for cloud outsourcing contracts to be shorter in duration.