There has been a steady fall in the total number of BPO contracts since Q3 2007. The first half of this year (2008) has seen 35% fewer contracts being signed compared to the same period last year. There has also been a fall in the average quarterly value of deals, by over 40%. Both these trends can be attributed to the slowdown in the financial services sector, and the relative share of other sectors has increased significantly. Mega deals (annualized value of over $200 m) appear to have vanished from the market.

      

Source: ValueNotes Outsourcing DealTracker

Note: Contract values were not available for all deals. This analysis is based only on BPO deals where contract values were available.

The number of deals with an average annual deal value below $100 m has increased from 56% of total deals in the first half of 2007, to over 60% in the first half of 2008. The average annualized deal value has fallen from $38 m in the first half of 2007 to $32 m this year, with the average tenure remaining the same at around 6 years. We believe that deals with an annualized value of $10 to $100 m will dominate the market throughout this year, primarily due to the global economic slowdown and financial crisis.

Knowledge services contracts increase

The number of contracts signed in ‘knowledge services’ is increasing rapidly. The relative share of contracts signed for knowledge services has increased from 10% in the first three quarters of 2007 to 17% in the next three quarters (i.e. Q4 2007 and Q1 & Q2 2008). However, the average value of the deals in this segment is significantly smaller when compared to traditional BPO services.

         

Source: ValueNotes Outsourcing DealTracker

With greater buyer awareness about offshoring knowledge services and increasing vendor capabilities, the share of knowledge services in the overall market will continue to grow. The average size of the deal is expected to rise in certain areas within knowledge services such as procurement outsourcing, publishing and engineering design services. We believe that this increase will be a result of greater buyer acceptance and vendor maturity. Large and established IT-BPO players will aggressively ramp up their offerings to target existing clients.

Going Forward…

The number of contracts signed in knowledge services continues to grow. While the typical value of contracts signed by publishing companies has been around $10 to $15 m (or less), RR Donnelley has signed a contract with F+W Publications worth $80 m spread over the next 5 years. We expect this trend to continue with a greater number of $50 m+ contracts, going forward.

Outsourcing of activities in enterprise functions like production planning, inventory, etc is on the rise. SAI won a contract from PNM Resources to provide outsourced services in production control, logistics and health and safety management.

Large contracts in these services will have longer lead times, given the relative lack of buyer maturity. While traditional BFSI contracts decline, vendors will seek to diversify by investing in enterprise and knowledge services.