ISG Index: Strong 4Q Caps One of Best Years Ever for Outsourcing

4Q ACV up 27 percent from prior year; contract volume up 6 percent

2014 ACV up 16 percent, to $23.1 billion, fueled by growth in ITO, new scope and restructured contracts, mega-relationships

Americas and Asia Pacific deliver strong double-digit ACV growth for the year; EMEA up 7 percent

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Information Services Group

Jan 15, 2015, 11:32 ET

STAMFORD, Conn., Jan. 15, 2015 /PRNewswire/ -- The global outsourcing industry delivered one of its best years ever in 2014, capped by double-digit growth in the fourth quarter fueled by a buyer's market in the Americas, a jump in mega-relationships, and a rise in contract restructurings, Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company, said today.

Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, show that fourth-quarter ACV surged 27 percent, to $5.8 billion, over the prior year as the number of contracts grew by 6 percent. For the full year, ACV reached $23.1 billion, up 16 percent, while contract counts edged up 4 percent, to 1,218, the second-highest level ever.

"The year ended on a high note as the market recorded its third-best showing in the last decade," said John Keppel, partner and president of ISG. "The double-digit gains we forecasted last quarter came to fruition this quarter, and that strength rippled through all regions. Growth was particularly strong in the Americas, as clients couldn't pass up getting more services for less in a buyer's market. We also saw the value of mega-relationships – deals worth more than $100 million annually – jump considerably, along with an increase in the value of restructured contracts, as clients sought greater flexibility and looked to capitalize on lower unit costs."

The value of restructured contracts rose 77 percent in the fourth quarter. With growth in new scope award value inching up by only 1 percent in the quarter, the annual increase in restructurings matched that of new scope, at 16 percent. Still, the total value of new scope awards was higher than that of restructured deals, $14 billion compared with $9.1 billion, for the year, even as growth in the number of restructured contracts grew 9 percent, versus only 1 percent for new scope. Meanwhile, the value of mega-relationships surged 354 percent in the fourth quarter, and 53 percent for the year, to reach $6.2 billion in 2014.

By domain, information technology outsourcing (ITO) continued to log steady growth in ACV, up 13 percent for the quarter and 19 percent for the year, to close out 2014 at $17.3 billion. The uneven business process outsourcing (BPO) market had a strong fourth quarter, growing 80 percent to finish the year up 8 percent, at $5.8 billion.

The Americas region recorded a 43 percent increase in ACV in the fourth quarter, and finished the year up 22 percent, to $8.2 billion. Contract counts also were up for the year, with 8 percent growth. Demand is on the rise, especially for ITO services, for which contract value grew 18 percent in 2014, marked by a number of larger deals for bundled IT services. Share has shifted from infrastructure to applications design and maintenance (ADM), in part due to intense price pressure on infrastructure driven by competition, cloud solutions, insourcing and automation, and a rise in demand for ADM solutions as companies invest in adding capabilities that will spur growth. BPO rose as clients sought industry-specific solutions.

Among industries, financial services ACV, at $2.1 billion, reached an all-time annual high, while energy ACV was up by more than half over the prior year, as slumping oil prices led companies in this industry to take a fresh look at outsourcing alternatives.

EMEA, the world's largest outsourcing market, saw its ACV rise by a 19 percent in the fourth quarter and 7 percent for the year, closing out 2014 at $11.9 billion, the eighth year in a row the region has led the world in contract value. The number of contracts, 588 for the year, was at a near-record level. ITO contract value rose 13 percent, fueled by large infrastructure awards, but BPO slumped for the second year in a row, down 12 percent. The region's two largest markets – the U.K. and DACH – recorded solid growth, while France surged ahead in both ACV and contract counts. A less mature sourcing market, France is seeing growing demand amid service provider consolidation, opening the door for India-heritage firms to make further inroads. Among industries, manufacturing, energy and transportation all registered double-digit growth in ACV, although the region's largest sector, financial services, was down by double digits, turning in its lowest ACV in the last five years.

After a dip in the third quarter, Asia Pacific came roaring back, with ACV up 21 percent in the fourth quarter. Although the region's second-half numbers weren't as strong as its first half, Asia Pacific's annual ACV still ballooned by 45 percent over the prior year, while contract counts climbed 11 percent. The value of both new scope and restructured contracts was up substantially, with the latter achieving its highest ACV ever. ITO contract value soared 50 percent, to reach a new high for the region, as did the number of awards, while BPO recorded one of its weakest years ever. Virtually all of the major markets in the region saw an increase in ACV, with the two largest markets, Australia-New Zealand and India/Southeast Asia, being the strongest. Among industries, telecom and manufacturing both notched exceptional ACV growth, with the former nearly tripling its 2013 numbers and the latter more than doubling its contract value from the prior year. Financial services, on the other hand, was down 3 percent.

Looking ahead, ISG said it expects healthy numbers in 2015, though growth in the first half will be flat, at best, in comparison with a strong first half of 2014.

"The sourcing industry is balancing on the precipice of a major inflection point," said Keppel. "Competition is heating up, not only between Western-heritage multinationals, India-heritage firms and niche players, but from cloud providers as they join the fray, particularly in the infrastructure services area. Although that may drive down unit costs, the industry also has huge growth opportunities, as digitization continues to transform the way work is done, with particularly strong growth expected in applications. Overall, prospects for the industry are quite strong."

Now in its 49th 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 4Q 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.

To view an infographic summarizing these data, visit: http://www.slideshare.net/ISG_Inc/3q14-isg-global-outsourcing-index

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