October 24, 2005 3:41 PM PDT

Asia's outsourcing deals shrink in size

Smaller, simpler outsourcing deals are being signed in the Asia-Pacific region, following a global trend which spells opportunity for specialist service providers.

According to the latest quarterly report by consultancy firm TPI, the average value of outsourcing contracts awarded in the third quarter in the Asia-Pacific region was $159 million. This is a significant drop, compared with $293 million a year ago.

In fact, the average value of contracts awarded in the region for the first three quarters of 2005 is $124 million, down by more than 51 percent from $255 million over the same period last year.

"This is a global trend, and it is also being felt in Asia-Pacific," said Duncan Aitchison, TPI's managing director.

Worldwide, the average value of larger contracts signed to date is $218 million, down 24 percent from $286 million a year ago. In Europe, the average contract value also fell, by 37 percent, compared with the first three quarters in 2004.

Organizations' preference for smaller deals was also reflected in the decreasing number of mega deals that were signed this year. Only eight such deals, worth more than $954 million, have been inked to date, compared with 13 over the same period last year, according to TPI.

The consulting firm attributed this trend to three key factors: First, the impact of price competition; second, a typically lower capital component since contracts are less likely to involve the transfer of assets to the vendor; and third, a growing preference for specialist providers.

According to Aitchison, service providers today are less inclined to leverage their balance sheets as a tool to seal outsourcing service agreements. "They (service providers) believe the responsibility for the financing of capital assets, ought to be the remit of the party who is most directly responsible for the utilization of those assets," he explained.

"With few exceptions, today's outsourcing practices are (about) delegating responsibility for a partial scope of a business process or function," he added. "It is therefore insufficient to align the capital and operational responsibilities with one party."

Taking control

Another factor that has resulted in deals with lower capital component is the company's preference to maintain better purchasing control.

"(Lower capital intensity) is being driven by increased regulation and market scrutiny of outsourcing deals that can impact a service provider's stock value. Clients are choosing to handle capital requirements through their own channels rather than through service providers," Aitchison noted.

TPI's data also revealed that in the past two years, 80 percent of deals have focused on a single process or function, compared with only 65 percent three or four years ago. Businesses that are choosing to outsource single functions, such as accounts payable or desktop support, are selecting a "best-of-breed" provider for each function.

This preference for specialized vendors is benefiting a wider range of providers and driving increased competition. "The pain of (fighting for) a smaller market is being felt across all geographies," Aitchison said. "However, the fact that this smaller pie is being divided into smaller pieces represents an increasing opportunity for (various) service providers (to be part of the same deal)."

Indian providers, in particular, are enjoying growing success. "As the recent ABN Amro deal demonstrates, Indian providers are also now competing for and winning the biggest application development and maintenance contracts," Aitchison said. India-based Tata Consultancy Services, Infosys and Patni Computer Systems, along with IBM and Accenture, won parts of the $2.2 billion deal to provide the Dutch bank with IT services over five years.

TPI's latest report also showed a rise in use of offshore locations. Forty-four percent of contracts signed worldwide in the first three quarters of this year involved offshore components, up from 40 percent in 2003 and 2004.

More business process outsourcing (BPO) than IT outsourcing deals today have offshore components--a reversal of the norm in previous years. "It seems that BPO clients are becoming increasingly comfortable with work being performed by offshore providers," Aitchison said.

Isabelle Chan reported for CNET Asia.

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The evolution of outsourcing
This isn't at all surprising. It is part of the evolution of outsourcing.

When offshore outsourcing first started to gain momentum, there was a tendancy to try to move too many things offshore. When mission critical projects started failing, people took a step back and realized that they need to handle projects in a more organized manner.

Our industry is changing. To stay on top of these changes and position your career accordingly, I have started a new blog available at <a class="jive-link-external" href="http://www.surviveoutsourcing.com" target="_newWindow">http://www.surviveoutsourcing.com</a>


Steve Larrison
<a class="jive-link-external" href="http://www.surviveoutsourcing.com" target="_newWindow">http://www.surviveoutsourcing.com</a>
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Posted by OutsourcingGuru (1 comment )
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