Outsourcing: Europe edging out NA?
Advisory player TPI shares insights into the changing equations globally..

?The European market has been steadily climbing since 2001??



In overtakemode.
In a year wracked by slowing down of global economies, Europe may well emerge the top outsourcing
continent, beating North America for the first time. In a recent research report, TPI, a global player in the
sourcing data and advisory business, says that through the first three quarters of the 2009 calendar ending
September, Europe outsourced $1.2 billion more than North America in average annualised contract value,
among the Forbes Global 2000 companies. (ACV is an estimate of annual yield. So, a $ 100 million contract
over 10 years would have an ACV of $ 10 million but the same over 5 years would have an ACV of $ 20
million.)
eWorld chatted up Siddharth Pai, Partner & MD, TPI India and Melany Williams, Partner & MD, TPI
Momentum, (the arm of TPI that brought out the report). Excerpts from the e-mail conversations:
Your report pegs Europe as possibly leading North America (NA) the past year in outsourcing spending.
Could you elaborate?


Siddharth Pai
Pai: Based on data available (as of third quarter of 2009), it appears that Europe will surpass NA in 2009 as
the region with the highest annual spending on outsourcing. According to TPI Research, NA is home to 606
G2000 companies, of which 45 per cent have an active IT outsourcing (ITO) or BPO contract. Though we
find that the number of G2000 companies in NA with an active outsourcing contract has been increasing
each year, the average spending levels per company have been gradually falling since 2002. The factors
that contributed to this decrease include
1. 30 per cent of the NA based companies spent less on outsourcing in 2009 versus 2008.
2. Recent outsourcing adopters are among smaller companies on the G2000 list
3. Hence, the spend is less on outsourcing, resulting in the overall decrease in average spending per
company


Melany Williams
Williams: The European market has been steadily climbing since 2001 while the North American market has
stayed in the $25-$31 billion range over the same time period. ACV within North America was $25.1 billion in
2001. It peaked in 2005 at $30.8 billion and ended 2008 at $29.6 billion. Our research for 2009 contracts
(excluding any new contracts signed in the fourth quarter) projects North America 2009 ACV will exceed $28
billion. ACV in Europe was $11.4 billion in 2001 and has steadily climbed each year. We project it may
exceed $30 billion in 2009 when all the numbers are calculated, on pace to achieve a 7 per cent growth rate,
and while this is the smallest growth rate over the last decade, it will still surpass North America in ACV. The
largest growth area for this region since the start of 2006 is among companies ranked in the Forbes? 501 ?
1000 range
What does this mean to outsourcing service providers? A blip in the radar or a turning point?
Pai: As the broader economic picture settles, TPI anticipates an uptick in outsourcing activity in Europe. We
are both seeing and hearing of a noticeable increase in new outsourcing programmes being launched. We
anticipate that this will be driven (as before) by north-western European countries
Williams: The G2000 companies in North America and Europe have been adopting outsourcing at similar
rates in recent years. In 2009, for example, 45 per cent of G2000 companies in North America had an active
ITO/BPO contract, compared with 42 per cent in Europe.
Why do we see this surge now in Europe? Cost-cutting as a reason exists even for US clients but offshoring
is still muted.
Pai: Cost reduction and efficiency issues will remain high on many corporate agendas. It's therefore
probable that many more functions and processes will be at least considered as potential candidates for
outsourcing by a wider cadre of European businesses as they seek to compete effectively with the rest of
the world
Which parts of Europe are offshoring more? The UK, as usual or Continental Europe?
Pai: European activity is strongly towards the northern part of the region with the UK remaining, by some
measures, the largest country market for all outsourcing services.
Williams: Further, Germany, Spain and the Netherlands are outsourcing more. While we already observe a
noticeable increase in outsourcing activity across the region, our report does not address offshoring
specifically.
Who would Indians fight there frequently? The likes of CapGemini and Logica in their respective markets?
Or would the IBMs and Accentures be at an advantage?
Pai: Both. When one looks at the more successful service providers over the past five years by European
country, it's clear just how influential domestic roots are: T-systems, Siemens, Atos Origin, Capgemini,
TietoEnator and Logica
On the other hand, the largest multinational service providers have been the ones to invest the most in
European delivery centres since the start of 2007. Accenture, ACS, Capgemini, IBM and T-systems have all
opened multiple centres in Europe during the time frame
Williams: I agree ? it would be both kinds. In Japan, for example, IBM and HPES have the strongest
penetration, followed by local firms such as NTT Data and Hitachi. In China, Unisys has the greatest
penetration, followed by IBM, Ericsson, Alcatel-Lucent, and Nokia. Both most likely vary by service line.
What kinds of projects are being outsourced now?
Pai: In the ITO space, particularly for bundled infrastructure and application services, there has been a
marked increase in demand from Germany, The Netherlands, Sweden and Switzerland. France remains a
relatively small market for outsourcing services (in relation to the size of its economy). Horizontal BPO
services such as HR, F&A will enjoy some growth in overall contract values signed but will remain very
much the minority segment of the European outsourcing market.
Ireland, Eastern Europe and Southern Europe are yet to signal any notable increase in appetite for larger
scale outsourcing
Williams: We have not observed any strong trends in Europe, except that ADM continues to be strong ?
with 15 companies adding ADM services to their outsourcing portfolio since 2006 ? this has been the
largest growth in any single service line (for both ITO and BPO).
Will Indian players see more manpower being deployed in their global delivery centres in regional markets to
service clients there? Or would offshoring see another boom as it did in 2003 after the 2000-2001
slowdown? Wouldn't language barriers come in the way?
Pai: Each country in Europe has a unique set of challenges when selling or delivering outsourcing services.
When selling, it's important for companies to have an established presence in each country where they want
to do business. Although it's acceptable for services to be delivered from other country locations in many
European nations, local account and service management, local relationships and local language capability
are all basic requirements for doing business of any scale in most European countries. For near-shore
delivery perspective, service providers need to consider the strengths and weaknesses of each country's
availability and composition of labour pool, infrastructure and the government support.
Williams: Generally, the India heritage firms are realising increased penetration in G2000 companies
headquartered in Europe and several large and medium-size India heritage firms have all seen their
penetration rates increase in each of the last four years. Penetration rates are similar for India heritage firms
in Asia-Pacific, though perhaps slightly lower on average.
Several Eastern and Central European countries are now firmly established as viable offshore/nearshore
locations, e.g., Bulgaria, the Czech Republic, Estonia, Hungary, Ireland, Latvia, Poland, Romania, Russia
and the Ukraine. With the possible exception of Russia, the key constraint for all of these locations is the
size of the qualified labour pool. In a number of these countries ? e.g., the Czech Republic, Hungary and
Poland ? major cities have reached a saturation point for service delivery, and new centres are moving to
secondary, and sometimes tertiary city locations.
On the flip side, as outsourcing adoption continues to grow in north-western continental Europe, it is likely
that the demand for solutions that leverage many of these nearshore locations ? especially for services that
interact with client internal and external clients ? will also grow.
Although nearshoring may grow in 2010, attitudes toward offshoring vary significantly from country to
country. In the UK, some 70 per cent of transactions include some significant element of global service
delivery in the solutions procured. In Scandinavia and The Netherlands, for example, this figure is nearer to
60 per cent, while in Germany, it is 50 per cent and in France, only 30 per cent of outsourcing contracts
involve the use of lower-cost geographies.