ITO Index - Q4 2015

ITO Index - Q4 2015

Who Is This Report For?

NelsonHall’s “ITO Index – Q4 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 Q4 2015 announced IT outsourcing contract activity and estimated spending during the quarter for IT services in Q3 2015, IT outsourcing and professional services. It also forecasted full year 2016 spending growth in IT services and ITO.

The report addresses the following questions relates to contract signings/bookings in Q4 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 Q3 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

What countries are the fastest-growing across North America and Europe?

How will spending evolve during 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 1- to 2-year view on how ITO spending is going to evolve. The analysis of past quarter IT services spending gives a 1- to 2-quarter view of forthcoming spending evolution.

Q3 2015 Bookings

ITO bookings were down 10% year-on-year (y/y) in Q4 2015. During full-year 2015, ITO bookings were down by 20%. As a result of this decline, 2015 was the worst years in terms of ITO contract awards since NelsonHall started tracking systematically the ITO industry, in 2002.

Fundamentally, the poor level of ITO contract bookings in 2015 reflects secular changes that have impacted the industry, namely the fact that:

The era for mega-deals is largely gone, with few exceptions per year

Client organizations have moved their procurement model toward renewals and extensions and towards relationships

Indian offshoring and new consumption models like cloud computing/IaaS are changing the way contracts awarded an also driving down prices, resulting in lower contract TCVs

Finally, client organizations have in the past two to three years largely shifted their spending towards digital transformation.

There is more to it: the market is saturated: vendors have been very effective in selling IT outsourcing services contracts in the U.S. and in the U.K., and across three major sectors: manufacturing, financial services and public sector. Yet, to a large extent, client organizations outside of those two geographies and three verticals have preferred awarding contract in the form of project services, rather than long-lasting contracts. For instance, the level of large scale outsourcing contracts common in the U.S. and in the U.K. is just seldom in other geographies.

Q3 2015 Spending

IT services spending in Q2 2015 was up 2%, driven by professional services (+5%). IT outsourcing was flat.

2016 Outlook

NelsonHall is predicting 2% growth (in local currency) in IT services spending in 2016. This mild growth will be driven by project services (up 3%) while IT outsourcing will be up 1% and maintenance down 1%. Digital transformation services (see note & below) will drive growth (up 18%) along with software testing (still growing in low double-digit figures).

As a result of clients shifting their investments towards digital transformation projects, revenues from other types of IT services will be down or flat at best:

C&SI (excluding on-premise ERP services and digital transformation project services) will up 1%

ERP services will be up 3%, thanks to transition to in-memory-based applications

IT outsourcing (excluding IaaS in private and public forms) will be down 1%. Within this segment, datacenter services will be down 7%, impacted by accelerating adoption of IaaS.

1. Q4 2015 ITO Bookings Analysis
2. Q3 2015 Spending Analysis
3. Vendor Activity
4. Outlook for 2016

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