US still the biggest pie, UK continues to decline

Written by Diksha Dutta | Diksha Dutta | Updated: Nov 14 2011, 05:45am hrs
Last week, the countrys largest software exporter Tata Consultancy Services (TCS) won its second biggest outsourcing contract worth $2.2 billion from UK based pension firm Friends Life. This is the second biggest deal for the company from UK after 2008, when TCS bagged the Citigroup deal in the BFSI segment. It might come as an eye opener that while the $60 billion Indian IT industry is busy talking about the US slowdown and diversifying into the European marketthe real concern is dwindling European market, especially UK. The outsourcing transactions in the UK decreased more significantly as compared to the US in the last quarter, reveals the recent quarterly report by Everest Group. Even rest of the world (ROW) countries were on a decline on account of outsourcing contracts signed. On the brighter side, small countries like Poland, Vietnam continue to emerge for niche services as delivery locations.

Undoubtedly, all geographies witnessed a decline in transaction volumes, with significant decrease in the UK and rest of the world. A look at the numbers: both transaction volumes and average contract value (ACV) decreased marginally in North America by 2% and 14% respectively. On the contrary, the UK reported 80 deals in the third quarter of 2011, a decrease of 22% from last quarter. ACV also decreased by 24% during the same period in UK. All the industry verticals reported decreased activity in this region except for manufacturing, distribution and retail (MDR) which reported 64% increase in volumes from last quarter. Even though public sector deals witnessed the sharpest decline from Q2, the largest deal was signed by Department for Work and Pensions (UK) and IBM, worth $1.1 billion for a seven-year period.

Analysing the US market, things were not as worse as the US. BFSI deals in the region increased by 41% from the last quarter and public sector deals decreased by 18% during the same period. Examples of large deals signed in North America includeA US based global multi-brand commercial products maker signed a 10-year contract with CSC worth $900 million and Manulife Financial signed a seven-year contract with IBM worth $659 million.

As the US and UK continue to fight as the biggest markets, on the delivery side a new trend was seen. Despite a decline in transactions, high offshore location activity provides indications that the outlook for the global sourcing market continues to remain cautiously optimistic in the medium-to-long term duration. Besides leading offshore locations such as India and the Philippines, there has also been interest in newer locations such as Poland which has emerged as a credible location for non-voice BPO and high-value IT services. Key growth drivers for interest in Poland include availability of skilled workforce with multi-lingual skills, moderate cost savings with source geographies and cultural affinity with Mainland Europe, says Salil Dani, research director, global sourcing, Everest Group.

Currency appreciation in Brazil, Chile and Malaysia (against the dollar) is eroding potential as delivery locations. Agrees Amneet Singh, vice-president at Everest, While India continues to be a location for high-end services, we have also seen smaller countries emerging for low-end work which is now going out of India.

Australia, Brazil and India continued to account for majority of transactions signed. In the broader picture, UK and North America constitute for 60% of the total outsourcing activity. While rest of the world is just 16% today, the small countries will definitely able to establish a niche for themselves in the coming times.