ISG Momentum® Report Reveals Trends Among Largest Companies in 27 Industries
Telecommunications remains the leading global industry for outsourcing, but the media sector saw the greatest growth in outsourcing activity in the last year, new research from Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company, has found.
Media outsourcing spending by annual contract value (ACV) rose $478 million, or 26 percent, in 2013, placing it well ahead of spending growth in the hotels, restaurants and leisure sector, where ACV rose by $155 million, or 53 percent.
Telecommunications remains the undisputed champion of outsourcing, with ACV of $21.6 billion, the largest number of contract awards (104), the highest average total contract value ($15.5 million), the highest percentage of companies that outsource (82 percent), and the highest average company spend by ACV ($393 million) in the last year. Yet, the industry saw its ACV drop by $862 million, or 4 percent, in 2013, second only to software and services (down $927 million or 47 percent) among industries that saw the largest declines in ACV.
These findings are included in the 2014 Momentum® Market Trends & Insights Vertical Report, which includes detailed data and insights on outsourcing activity among the world's 2,000 largest public companies in 27 vertical industries.
"Media companies are expanding the scope of their activity beyond ITO and are now using outsourcing to support their strategic repositioning in response to the digital disruption in the industry," said ISG Chief Research Officer Paul Reynolds. "Growth in the hotels, restaurants and leisure vertical is coming from a small base and is motivated by the desire to increase speed of innovation. In contrast, telecommunications services remains one of the most sophisticated and mature markets, and much of the outsourcing activity there involves network sharing and support agreements among telecommunications providers themselves."
There were equal amounts of volatility (double-digit ACV swings in 11 of the 27 industries) and stability (12 of the 27 industries saw ACV changes of 5 percent or less) in outsourcing activity in the last year. Overall, losers (those with declining ACV) outpaced winners (those with increasing ACV) by a margin of 2 to 1, with an overall average decline in ACV of 4 percent among the 27 industries studied.
Spending was subdued in most verticals as clients took advantage of intense service provider competition and cheaper cloud computing and X-as-a-Service (e.g. Software-as-a-Service, Infrastructure-as-a-Service, Business Process-as-a-Service, etc.) offerings to reduce their service delivery costs.
While it was challenging for service providers to grow ACV in most verticals, outsourcing penetration overall continued to rise. Currently, 45 percent of the world's largest public companies have an active outsourcing contract, up from 40 percent in 2010.
"Outsourcing is growing and maturing very differently across industries. Some of the most interesting differences are revealed in how companies are approaching SMAC (social, mobile, analytics, cloud) technologies," said Reynolds. "On one hand, there is consistent demand for services that help companies take advantage of mobility and analytics. Social media and cloud, on the other hand, are much more mixed. Companies in some verticals are using outsourcing to quickly implement social media programs or cloud-based services, but they remain a low priority in other industries."
Other highlights from the 2014 Momentum® Market Trends & Insights Vertical Report include:
Risk reduction was a common theme in recent outsourcing engagements. Companies are structuring their outsourcing contracts to reduce operational and financial risk and are scrutinizing service providers more carefully, especially in verticals with stringent compliance requirements such as banking, diversified financials, insurance, and health care equipment and services.
The outsourcing penetration rate ranges from a low of 24 percent in the construction vertical to a high of 82 percent in telecommunications.
There is an even larger variance in average annual per-company spending. Telecommunications companies top the list by spending an average of $393.4 million annually,16 times more than the $24.3 million average ACV for semiconductor companies.
While media had the highest one-year growth in ACV, the utilities sector has shown the steadiest growth, recording the highest three-year compound annual growth rate, 18.5 percent, among the 27 industries studied.
"One of the trends we're seeing in most verticals is that clients are demanding specific industry expertise from their service providers," said Reynolds. "Clients are splitting the scope of their outsourced services so they can work with more best-of-breed providers."
