The RPO market continues robust growth
Information Services Group (ISG) publishes a quarterly “ISG Outsourcing Index,” which is widely read in the services industry. Q1 2015 wasn’t a pretty picture. The Americas saw a modest 10 percent gain in ACV, and India/South Asia showed strong. But the rest of the world took a bullet, so to speak; EMEA’s ACV declined by 25 percent, Asia Pacific by 45 percent, and Australia/New Zealand had one of the weakest quarters in a decade. So the modest gains are dramatically offset by large losses elsewhere. This is further evidence of what I’ve been blogging about for some time – the industry is at an inflection point and preparing to shift. Let’s look at where the shift is headed.
But, first, a word of caution. We at Everest Group stopped publishing our index based on publicly announced deals many years ago because we found the data was inherently flawed. If all you use is publicly announced deals, you’re only looking at the large transactions and only some of those because many deals are not published. The next-generation deals and smaller deals are typically not announced. So the data is inherently noisy. Having said that, there is some value to looking at what’s happening in publicly announced deals. As such, the ISG Outsourcing Index is as good as any.
The services industry is now in a mature state. As such, it has four major characteristics or themes in what’s happening:
Cyclical impact. As a mature industry, the services business is affected by the cyclical economy to a much larger degree than it has been in the last 15 years. To wit, where we have a growing economy in North America, the industry has share increases; where there are struggling economies in the rest of the world, the industry has share and ACV decreases.
Brownfield deals. The services world now is largely defined as brownfield deals in that the majority of activity is recompeting existing scope rather than capturing new scope. In this world, awards are smaller transactions for shorter durations.
Pricing pressures. In a recent blog post, I detailed the pricing pressures now hitting service providers and resulting in a major downward spiral and pricing wars. The ISG data also reported the downward-pricing situation. Brownfield deals also exacerbate this situation as they’re hinged on winning recompetes with existing customers, which are intent on driving prices down.
Shift toward smaller transactions. In addition to the brownfield impact there is an uneasiness in the market due to customers’ desire to break up current deals and shift to next-generation models that are automation based, as-a-service or digital. We see this movement clearly as we look at the unannounced deals that we track at Everest Group. Our observation is that these unannounced deals are taking share but with small ACV awards.
This phenomenon is particularly prevalent in the infrastructure martketplace, where there has been a secular shift from large, bundled, asset-heavy transactions to asset-light, unbundled transactions with shorter duration. The emerging markets of cloud computing and as-a-service accelerate this movement. Finally, we see tangible evidence of enterprises preparing to make large-scale shifts to cloud by adopting shorter, more flexible transaction structures for their legacy infrastructure and applications.
The industry faces the prospect of a maturing market impacted by economic cycles, pricing pressures, brownfield focus, and customers shifting to new models. The good news is that the new models and technologies are growth areas for the industry. However, these deals are smaller and are not usually announced deals and therefore don’t show up in the ISG Index.
In conducting price benchmarking, it is important to consider deal-specific factors that can impact pricing, as an apparent excessive price could be appropriate
Increasing buyer preference to unbundle services leads to shorter deal duration
Longer-term deals (5+ years) have taken up a greater share of the BPO transactions market over the past year while share remains relatively unchanged in the ITO market.
Growth of cloud services is driving preferences for smaller deals with more flexible constructs
New BPaaS solutions (process+SaaS), offered by providers such as Workday and SuccessFactors, which had made a strong mark in the wider HR market in the past, made their entry into the HR outsourcing market in 2013. Enterprises signing new deals, and a number of organizations with existing HR outsourcing arrangements, contracted with providers for these new third-party BPaaS solutions.
Over the past five quarters, outsourcing market activity has seen a slow but steady rise, while GIC set-up and expansion activity has been uneven.