High cost pressures, market uncertainty drive number and value of large application outsourcing deals in capital markets to five-year lows.
DALLAS, AUGUST 25, 2015 — In 2014, key indicators in the capital markets IT outsourcing segment reached five-year lows as firms struggled with high cost pressures, regulatory burden, and market uncertainty. Everest Group—a consulting and research firm focused on strategic IT, business services, and sourcing—reports that the number of new, large application outsourcing (AO) deals in capital markets dropped 58 percent, while the average total contract value (TCV) dropped 28 percent.
Within the Banking, Financial Services and Insurance (BFSI) sector—which continues to be the leading adopter of IT outsourcing—the share of capital markets deals declined significantly in 2014 (from 32 percent share to 14 percent share) and average Annual Contract Value and average TCV of capital markets deals lagged that of banking and insurance.
Nevertheless, capital markets AO revenue for 24 leading service providers grew strongly at 14 percent over the last three years, as clients rationalized spend among fewer providers. The key drivers for future growth will be investments in risk and regulatory compliance management solutions, automation, legacy modernizations, big data (especially for risk and collateral management), and utility services for reconciliation and trade processing.
“The capital markets industry is grappling with high regulatory pressures, intense competition and an uncertain economy, and these pressures are changing the profile of the IT investments in the sector and driving a more focused sourcing agenda for capital markets firms,” said Jimit Arora, vice president at Everest Group. “Therefore, the implications for service providers are to tailor their offerings with next-generation technologies and offer utility-based services. They should also look to collaborate with clients to invest in innovation and form alliances with leading platform providers.”
These results and other findings are explored in a recently published Everest Group report: IT Outsourcing in Capital Markets—Annual Report 2015: Steering Through the Chaos.
This report provides an overview of the AO market for the capital markets industry, through an in-depth analysis of large-sized AO contracts. The report analyzes key trends in market size and growth, demand drivers, adoption and scope trends, emerging priorities for buyers, key investment themes, and future outlook for 2015-16.
Other key findings in the report:
- The BFSI sector continues to be the leading adopter of IT outsourcing. Banking remains the largest subsector, followed by insurance and then by capital markets.
- The total number of BFSI IT deals announced in 2014 declined by 5 percent as compared to 2013; the total value of publicly announced BFSI IT contracts declined by as much as 43 percent during the year.
- Strong decline in cumulative TCV of BFSI ITO contracts was primarily driven by reduced IT spending by capital markets and insurance buyers.
- Regulatory compliance and analytics/data management continued to be the top investment priorities for capital markets firms. Adoption of mobility in wealth management and shifts toward cloud also factored into investment priorities.
- Fixed-price engagements continue to be the most popular, as capital markets buyers preferred predictability in an uncertain regulatory environment. Demand for output-based pricing models remained flat at 4 percent, as both buyers and service providers were uncertain on the output of their experimentation with next-generation technologies.
- More than 75 large AO capital markets deals with TCV of US$8.3 billion are coming up for renewal in the next five years.
***Download Complimentary 15-page Preview Report Here*** (Registration required.) This preview summarizes the report methodology, contents and key findings and offers additional resources for further study.
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High-resolution graphics illustrating key takeaways from this report can be included in news coverage, with attribution to Everest Group. Graphics include:
- Capital markets ITO buyers favor the fixed-price model
- Key investment themes in capital markets AO
- Capital markets ITO buyers trends and implications for service providers
