ITO Index - Q3 2015
Who Is This Report For?
NelsonHall’s “ITO Index – Q3 2015” report is one of a series of quarterly reports for tracking trends in the levels and nature of IT outsourcing (ITO) contract and spending activity designed for:
Sourcing managers investigating sourcing developments within IT services and IT outsourcing
Vendor marketing, sales and business managers monitoring ITO contract activity and developing strategies to target ITO service opportunities
Financial analysts and investors specializing in the IT services and IT outsourcing sector.
Scope of the Report
The index assesses developments in the ITO market by providing two complementary analyses: one focused on ITO spending and the other on bookings, i.e. contract signed. The index therefore provides a dual view on market conditions in ITO by providing a short-term view of how spending is to evolve in the next quarter (through its spending analysis), and how it will evolve in the mid-term, in the next 12 to 18 months (through its bookings analysis).
This week’s webcast focused on Q3 2015 announced IT outsourcing contract activity and estimated spending during the quarter for IT services in Q2 2015, IT outsourcing and professional services. It also forecasted full year 2015 and 2016 spending growth in IT services and ITO.
The report addresses the following questions relates to contract signings/bookings in Q2 2015:
What is the trend in IT outsourcing contract activity globally and by geography (North America and Europe)?
What is the trend in terms of new scope contract (vs. existing scope contracts) globally, and by geography?
The report also tracks IT services, IT outsourcing and professional services spending in Q2 2015 and before. It responds to the following questions:
What is the trend in IT services, ITO and professional service spending in the past quarters and years?
Which countries are the fastest-growing across North America and Europe?
How will spending evolve during 2015 and 2016?
Key Findings & Highlights
The analysis of ITO bookings and past ITO spending provides a complementary view of how ITO spending is likely to evolve in the coming quarters.
The analysis of ITO bookings provides a one to two year view on how ITO spending is going to evolve. The analysis of past quarter IT services spending gives a one to two quarter view of forthcoming spending evolution.
Q3 2015 Bookings
ITO bookings were down 30% year-on-year (y/y) in Q3 2015. Decline was driven by North America where bookings declined by 60% y/y. The growth in the region was driven by one mega-deal and a dozen of mid-sized deals. Europe was up 60% y/y.
Over the Q1-Q3 2015 period, ITO bookings were down 30% y/y. North America was down 30% y/y during the period. Europe was down 20% y/y.
An important KPI is the level of new scope contracts (as opposed to existing scope contracts), which was an estimated 14% during in Q3 2015, the lowest level since Q4 2012. It was very low (5%) in North America and relatively low in Europe (20%). Nevertheless, over the Q1-Q3 2015 period, the proportion of new scope contracts was ~40%, a level similar to that of full year 2014 (40% too) globally and across North America and Europe.
Meanwhile the number of deals during the quarter was around a dozen, with one mega-deal, with the rest being deals in the $100m-$999m range. This is relatively mediocre number of contracts, in the lower limit of the traditional range.
Q2 2015 Spending
IT services spending in Q2 2015 was up 3%; this growth was above our expectation (~2%). We think this high growth was an anecdotal quarterly variation rather than announcing an increase in IT services spending growth. Growth was driven in Q3 by professional services (+5%). IT outsourcing was flat.
North America’s commercial sector continues to drive spending growth (+10% y/y in Q3), while U.S. federal continues to decline (by 4%). Europe was down 2%.
2015 and 2016 Outlook
NelsonHall maintains a cautious 2015 and 2016 forecast for spending in IT services, IT outsourcing and professional services. This is in spite of improved economic conditions in mature countries.
Spending in IT infrastructure management is only to grow marginally in terms of spending. This flat growth will result from the impact of Indian offshoring (which currently has a 10% market share) and increasing from public cloud (market share: 6%). Both the Indian industry and public cloud vendors have strong potential for gaining further market shares: this will impact prices and spending for the years to come
Spending in professional services will remain cyclical and will continue to increase, along with better economic conditions. Meanwhile, spending on digital transformation professional services (i.e. analytics and big data; SaaS application services; e-commerce, mobility and user experience; and IoT) will rise. As a result, spending on non-digital transformation will be flat. Client shift in demand towards digital will impact IT services vendors and result in restructuring.