IT’s OK, and it’s great for BPOs

If the trend in information technology outsourcing contracts, as measured by the Global TPI Index is anything to go by, Indian software companies should feel at ease, though business from Europe is showing a drastic decline.

For June-September, the index touched a total contract value (TCV) of $25.1 billion, the highest ever, mainly due to a $7.2 billion giga deal between Atos and Siemens.

That’s a 41% quarterly pop in TCV year on year, and 31% sequentially, or over April-June.

Excluding the Siemens’ acquisition-based deal, contracts from Europe, Middle East and Africa rose a bare 4% and fell 23% sequentially.

To be sure, TPI data do not capture incremental business won from existing clients. They also do not track deals below $25 million, which, Nomura Securities has said, are worth $40 billion a year.

TPI is the world’s largest third-party oursourcing advisory - which is business that constitute about a third of the total outsourcing deals signed, according to Nomura estimates.

The others are contracts signed directly between software companies and clients.

Ex-Siemens, the Index tallied 192 contracts worth $17.9 billion.
That’s still above the average TCV of the five preceding third quarters and in line with the previous period.

“The third quarter witnessed a notable pickup in TCV, stoked primarily by the Siemens-Atos deal,” said John Keppel, partner & president, information services, ISG, in a statement issued by TPI.
“However, underlying market dynamics remain steady and we still project the global outsourcing market should end the year well within the historical norms.”

Sans the mega deal, IT outsourcing contract value down 8% both year on year and sequentially.

On the other hand, business process outsourcing (BPO) segment was set to deliver best performance since 2008 with value of contracts rising 18% year-over-year, although it dipped 4% sequentially.

Interestingly, financial services, historically an outsourcing leader, has seen contract values rise modestly and TPI predicts it may end lower than last year’s $27.7 billion.

Contract value from the Americas was flat on year and up 11% sequentially. “The region will need to finish the year with $15 billion in TCV to match its 2010 tally, well above its $10 billion average in recent fourth quarters,” said TPI.

Asia Pacific TCV dipped about 15% year-over-year but increased 20% sequentially, with the majority of contracts awarded in Australia and New Zealand.

TPI believes if Asia Pacific and EMEA maintained their current pace, they would finish the year within range of their 2010 TCV levels.

The third quarter TPI Index was in stark contrast to Barclays Capital’s survey in September of 100 chief information officer (CIO) in US and Europe, which revealed weak spending trend because of “pared down growth expectations” compared to the merchant bank’s findings in April survey.

Based on its interactions with CIOs, Barclays Capital has come to the conclusion that overall IT spending expectations in the second half of this year was showing some moderation compared April.
However, despite the weakness in the second half, most respondents in the survey have built a reasonable 1.8% on-year increase in tech spending in the current year, with a similar hike expected next year too.

Barclays Capital analysts Bhuvnesh Singh and Vaibhav Dhasmana, in a note last week, expect growth rates of IT services vendors to moderate to high teens over the next five years compared with typical 30-40% revenue CAGR (compounded annual growth rate) in the previous cycle (2003-07).

The duo said growth in the tech sector would be driven by increased outsourcing as customers seek a more flexible cost model, limited availability of technical staff in the developed world and a shift to new business models led by themes of cloud, mobility and social networking, among others.

Analyst Ashish Chopra Motilal Oswal, in another note, also expects clients to cut tech budget by 3-4% which could result in “sub-normal” year but aid growth for its offshore vendors.
“Factors like delay in decision making and uncertainty in macroeconomic environment will lead to cuts (in budgets),” he said.