European outsourcing still sluggish in Q2

Europe's outsourcing market has been sluggish this year, with a total contract value (TCV) in the second quarter dropping by 11% q/q to €7bn across the EMEA region, according to a report by Information Services Group (ISG), an advisory services company.

There are two main reasons behind that, it says. The decline in TCV in the EMEA region was caused by both a slow down in the pace in number of granting smaller contracts and by the absence of mega deal activity during the first half of the year.

Also, the region was struggling economically and the euro-related uncertainty will continue to have some negative impact on the outsourcing in the region, it says.

The 2Q12 Global TPI Index, which covers commercial outsourcing contracts worth $25 million or more, measured total contract value (TCV) of $21.4bn, an increase of 7% from both the second quarter of 2011 and the first quarter of 2012.

As far as the sub-regions in Europe are concerned, the decline in contracting activity affected to a larger extent the mature markets. The UK and the DACH region were affected by the decline while Scandinavia remained the only region in this group that was close to its five-year average in terms of TCV, the study says.

On the other hand, the less advanced geographies - such as France, Southern and Eastern Europe - managed to achieve levels close to their five-year average values, it says.

Europe saw a drop both the number and value of contracts signed in the second quarter. "A decline in activity across all contract bands has negatively affected EMEA's ITO TCV in H1 2012" says Duncan Aitchison, North Europe, ISG.

Breakdown by sectors in the EMEA region shows that the financial services and manufacturing accounted for the large share of the number of contracts granted along with their value, according to the study. "Energy and telco and media have had particularly disappointing years so far, while travel, transport & leisure and retail finished the half year ahead of their five year average" explains Aitchison.

In terms of public sectors' activity, the UK's market accounted for around 80% of all EMEA public sector spending in the previous years. In the first half of 2012, the market share for UK public sector expanded to over 90%, it says.

Q2 saw a drop of 11% counting quarter-on-quarter to €7bn. For the half year, EMEA TCV declined by almost 25% y/y while global TCV in Q2 rose 7% both for the quarter and the year.

Global trends show that mega deals were absent in Q2 and returned to the market during the second quarter. Also, Asia Pacific's region was up in Q2 by almost 45%.

ISG believes that there might be another downward shift in contract durations. "Third quarters are typically soft and comparison against usually strong 3Q11 will prove exceptionally tough - however fourth quarter performance should pick up as several mega deals are awaited," it says.

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