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· Emergence of European "Big Five"

· Growth of outsourcing market slows

· Shift to best of breed procurement a ‘myth’

Press & analysts conference by tele-conference and webcast at 10.30am, Friday 15th July –

Restructuring* of outsourcing contracts has hit a record high of 20% of the value of deals signed in the first six months of 2005, almost double the ten year average of 11%, according to the latest Quarterly Index from TPI.

Duncan Aitchison, Managing Director, International with TPI, the leading sourcing advisory firm, commented:

"In general contract restructuring is prompted by considerations such as price, service, change of scope or additional capability. Lately, however, the emergence of a growing number of viable offshore locations, both nearshore and farshore, has added new impetus to organisations’ desire to renegotiate. s the market matures, outsourcing buyers are also developing an increasingly precise view of their specific needs and of what the market can provide.

"With one in five contracts let now taking the form of a restructuring, providers are under increasing pressure to provide a responsive service. From a buyer’s perspective, this trend also emphasises the critical importance of both flexible contracts and robust exit strategies."

Of the 112 outsourcing contracts worth over €40 million signed in 2005 to date, 25 have been restructurings, with a combined value of €4.6 billion.

Growth of outsourcing market slows

While the global outsourcing market continues to expand it is doing so at a decreasing pace. To define the ‘true’ size and growth of the outsourcing market TPI has examined service providers’ annual revenue from both new and ongoing outsourcing contracts. Excluding restructurings, annualised revenue growth across the industry for 2004 was 5.9%, down from a high of 22.3% in 1999.

TPI predicts that the business process outsourcing (BPO) market will grow by 8.6% in 2005 and the information technology outsourcing (ITO) market by 6.7%. Over the next three years the company forecasts a compound annual growth rate (CAGR) of 4.6% in ITO and 17.1% in BPO.

Duncan Aitchison said:

"The outsourcing market is becoming mature as is demonstrated by a number of factors including more contract restructuring, and a greater diversity of service providers. Slowing growth is simply consistent with this maturity."

Slow start to the year

112 transactions valued at €23 billion have been signed globally to date in 2005. This represents a 13% drop in value compared with this time last year. In four of the past five years around €56 billion worth of new business has been awarded each year. Almost €32 billion worth of contracts will need to be signed in the next 2 quarters if the global market is to match recent levels.

Duncan Aitchison said:

"The second half of the year is traditionally stronger than the first. However, it will still present quite a challenge for the industry to achieve the €32 billion in contract signings needed for a total annual contract value consistent with previous years."

Europe’s demand-side dominance continues

Europe has maintained its demand-side dominance of the global outsourcing market in the last six months, accounting for 51% of new outsourcing contracts awarded, on a par with its market share of 50% a year ago. The Americas have remained on 44%, while Asia/Pacific’s share has fallen marginally to 5%, down from 6% this time last year.

Emergence of a European "Big Five"

The growth of the European outsourcing market has led to the emergence of a distinct European "Big Five" – Atos Origin, BT, Capgemini, Siemens and T-Systems. Their combined share of the total global contract value signed to date in 2005 is 28.1%, up from just 5.2% in 2002.

The European Big Five’s success is due to triumphs on their home continent, where they have won almost 45% of the value of contracts awarded to date in 2005, surpassing the global "Big Six" – Accenture, ACS, CSC, EDS, HP, and IBM – who have won 35% of European contract value.

This new European elite also performed particularly well in the global ITO market, winning 36% of new contracts by value, up from 28.1% in 2004.

Duncan Aitchison commented:

"It is interesting to note that the contracts won by the European Big Five tend to be shorter than those won by the global Big Six. This means that when the value of new contracts is viewed on an annualised basis, the Big Five is making up even more ground on the Big Six’s lead than the new contract values at first suggest."

Bumper year to date for BT

So far in 2005, BT has outperformed its Big Five associates as well as all of the Big Six with the exception of IBM. BT has won 7.6% of contacts signed to date in 2005 and a massive 19% of total contract value. The next most successful Big Five provider so far this year has been Siemens with 5% of the global contract value awarded.

Shift to best of breed a ‘myth’

Contrary to speculation that a move towards ‘best of breed’ procurement based on more specialised contracts is having an adverse impact on the largest outsourcing providers, TPI research reveals that there is no meaningful trend in this direction and that, even where multiple providers are used, one of the Big Six or Big Five is always involved.

Duncan Aitchison said:

"Our research dispels the myth of a shift to best of breed procurement. There has been an almost equal split in the use of either single or multiple providers consistently over the last decade."

TPI analysed the sourcing strategies of 108 Global-2000 companies that had sourced over €800 million in the last 10 years. This revealed that 44% of companies used one service provider, compared with 56% who used two or more. In over 20% of cases at least 4 different service providers were engaged.

Mega deals continue

TPI data also reveals that mega deals (contracts valued at over €800 million) are continuing to come to market. There were 4 mega deals in the last quarter and TPI is currently advising on a further 7, which are likely to be signed within the next six to nine months, with an anticipated value of almost €10.5 billion.

Duncan Aitchison continued:

"Despite much talk about the demise of the mega deal, these large contracts continue to be feature of the global outsourcing market. Due to their size these deals receive a great deal of attention, but they have represented only an average of 7% of deals over €40 million for the past two and a half years."