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Everest sees outsourcing dip.

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Dallas: The global outsourcing and offshoring market saw significant drops in transaction volumes during the third quarter this year, a substantial decline for the first time in four quarters, according to Everest Group, an advisory and research firm on global services.

The sluggish market witnessed 472 outsourcing deals compared to 508 and 516 transactions in the first and second quarters of this year, respectively. Following a record spike in captive announcements last quarter, captive activity also fell back to a more "normal" level of 20 setups.

Everest Group's Market Vista: Q3 2011, a quarterly report on global outsourcing and offshoring activity, reports third quarter global transaction volumes reached about US$2.7 billion in annual contract value (ACV), an increase of 6 percent over the previous quarter, primarily as the result of three mega deals signed during the quarter. Compared to Q2 2011, the market saw a decrease in Business Process Outsourcing (BPO) transactions by 12 percent and IT Outsourcing (ITO) transactions by 7 percent.

"The global outsourcing and offshoring market is beginning to show signs of slowing growth in selective areas, but we'll need to see a few more quarters to determine if this is the beginning of a downturn trend," said Eric Simonson, managing partner of Research. "Although captive setups dropped during the quarter, the captive continues to be a core component of global sourcing strategies, adoption activity remains healthy, and significant activity is spreading across industry verticals such as manufacturing and healthcare. Despite a decline in transactions, high location activity, particularly by service providers, provides indications that the outlook for the global sourcing market continues to remain cautiously optimistic in the medium term."

Other third quarter 2011 findings include:

  • The BFSI (banking, financial services and insurance) sector continued to lead transaction activity and the MDR (manufacturing, distribution and retail) vertical saw transaction volumes rise 8 percent. While there was a large drop in deals signed by government and defense organizations, the energy and utilities sector saw the largest percentage increase in contract activity.
  • Both transactional and ACV volumes marginally decreased in North America and Continental Europe whereas declines were sharper in the United Kingdom and Rest of World (Asia Pacific, Middle East, Africa and Latin America).
  • Three megadeals, each valued at over US$1 billion in total contract value (TCV), were signed in the quarter.
  • India dominated the captive market but considerable activity also was witnessed in Europe, Middle East/Africa and Rest of Asia. The first captive divestiture of the year occurred during the quarter.
  • Offshore activity saw 46 delivery centers established in the third quarter compared to 38 in the previous quarter. Significant activity occurred in India and Africa.
  • Service providers' consolidated revenues increased over the second quarter, but consolidated margins fell over the same period. (Financials lag other service provider activity by one quarter.)

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