ISG Momentum® Sourcing Digest (Half-Yearly) October 2020
06 Oct 2020
by Aparna Gajanan, John Burnell, Sagnik Biswas, Aditi Abhijeet, Sakshi Takkar, Praveen Nair, Ammar Mohammed, Bharti Nagraj, Soumya Kattimani, Sharan K, Ashwanthram M
- The pandemic had a clear immediate influence on sourcing activity, and the influence was rather consistent across ITO and BPO service lines around the world. Not surprisingly, the sourcing market softened. The notable and consistent development is that committed outsourcing spending slumped much more severely than contract volume. Enterprises continue to issue outsourcing contracts, but the contracts are shorter and for less value than in recent years. This trend was more pronounced in Q2 2020 than Q1, when the scope of the pandemic was better understood and more impactful on business and society.
- The annual total contract value (TCV) awarded had been fairly consistent for the past five years but was on pace to be cut in half in 2020. The combined TCV for ITO and BPO contracts in the first half of 2020 was only 23 percent of the average for the previous five years, and contract volume was at 35 percent. The average contract value fell by 56 percent from 2019.
- The average contract signed in the 2020H1 was more than a year shorter than the average for 2019. Media had the lowest among verticals, at just 1.2 years each.
- 2019 had been a good year for spending, as only two of the 16 verticals covered in this report experienced a year-over-year decline in active annual contract value (ACV).
- Coming off a strong 2019, the first six months of 2020 represented a sharp reversal. The hardest-hit industries include CPG, Banking, Utilities and Oil & Gas. The Manufacturing sector produced approximately $2 billion less ACV in the first half of 2020 compared to 20191H, a 33 percent drop on a 14 percent decline in contract volume.
- Surprisingly, Hotels committed twice as much ACV in the first half of 2020 than they did in all of 2019, but only about $200 million. Retailers were hard hit by the pandemic, but their first half 2020 TCV was at 81 percent of the full-year 2019 total.
- Other verticals where contract value contrasted to the trend and was strong in 2020H1 include Chemicals, Drugs & Biotechnology and Healthcare Equipment & Services.
- As noted, volume performance was stronger than TCV. At the midpoint of 2020, BPO contract volume was at 47 percent of the full-year 2019 level and ITO was at 43 percent. However, the total contract value for ITO agreements in 2020’s first half was only 27 percent of the prior-year total, and BPO TCV was only 11 percent.
- The ADM market provides a good example. Average ACV had been rising for several years but was approximately 50% lower in 2020H1, on solid contract volume. Several ITO and BPO service lines had similar patterns.
- Workplace Services fared the best among ITO service lines but was still below its 2019 TCV pace. Within BPO, Finance & Accounting contract volume soared.
- The Americas was the strength of the BPO market in early 2020, which represents a reversal from 2019.
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