Third of outsourcing deals have offshore and BPO components

Offshoring and business-process outsourcing (BPO) continue to make up an increasing proportion of outsourcing deals despite a slow start to 2004 in both value and numbers of deals signed.

The figures, based on a quarterly index of worldwide private-sector deals advised on by outsourcing consultancy TPI, show that 51 of the transactions were signed globally in the first quarter of the year, at a total value of €9.9bn. The figure is below the last eight-quarter average of €13.5bn but still above first quarter averages for the last two years.

Although actual BPO - involving the outsourcing of a complete business function such as HR - remains some way behind industry hype, with traditional IT outsourcing accounting for 80 per cent of deals, TPI claims that the pipeline of potential deals indicates the rate of adoption will increase during 2004.

The first quarter of 2004 saw the fourth consecutive quarter of increasing global BPO contract award values, with 11 deals totalling €2.8bn in value representing almost 30 per cent of all outsourcing deals so far – higher than the usual 80/20 split. These BPO deals were focused on CRM, HR and finance and accounting. Europe did not follow this trend, with just one BPO contract award over €40m so far this year. But Duncan Aitchison, managing director at TPI, said in the report that this is not a trend.

"Looking ahead, we believe these numbers will recover as our pipeline indicates that some sizeable BPO transactions should take place in Europe in 2004," he said.

The 'big six' still dominate BPO and Accenture is some way ahead of rivals, with involvement in 91 per cent of total BPO deal value.

Globally, offshore outsourcing continues to gain momentum with 50 per cent of the 16 contracts that TPI has advised on so far this year containing offshore components. This compares to 48 per cent last year. But Europe again lags behind with only 20 per cent of TPI-advised outsourcing transactions in the region since 2003 having any offshore element. Again, this is likely to change, according to Aitchison.

"As European companies are starting to implement global sourcing strategies, and to consider options in India, the Far East and Eastern Europe, it is likely that we will see more activity around offshoring in the coming quarters," he said.

Offshoring is also expected to pick up again in the US once political issues subside after the November presidential election, according to the report.

Aitchison said the European market will remain buoyant but said trends such as BPO and offshoring are changing the nature of the outsourcing market.

"The outsourcing market is changing," he said. "Deal volumes have stayed the same but total deal value has declined, partially because of BPO and offshore influences, and partially because of the separation of capital responsibilities in service contracts."