Outsourcing megadeals hit fourth-quarter peak
Information Services Group, a leading technology insights, market intelligence and advisory services company, released TPI Index data showing healthy growth in the global outsourcing market during the fourth quarter amid record contracting activity for the full year.
The 4Q11 Global TPI Index, which covers commercial outsourcing contracts valued at $25 million or more, found total contract value (TCV) of $26.4 billion in the fourth quarter of 2011, an increase of 7 percent over the same period a year ago. Growth was led by mega-deals – those contracts with TCV of $1 billion or more – business process outsourcing (BPO), and Europe, the Middle East and Africa (EMEA).
For all of 2011, TCV reached $95 billion, an increase of 3 percent over the prior year, and the highest annual result since 2005. In addition, 2011 was the busiest year on record for the outsourcing market, with 870 total awards, well above the average of the five prior years of 690.
An analysis of TPI Index data shows the intensified contracting activity is the result of a decade-long rise in the smallest awards. While the numbers of mega-deals and mid-range contracts awarded each year has remained relatively stable since 2002, those valued at $100 million or less have more than tripled.
“The acceleration of contracting activity alongside continued growth in overall contract value is a notable shift in the global outsourcing market,” said John Keppel, Partner & President, Research and Managed Services, ISG. “Stoked as much by buyer dissatisfaction with large-size contracting as by suppliers expanding their capabilities, it is challenging clients to implement more sophisticated governance models and prompting service providers to team together to win and deliver business.”
The TPI Index, presented by ISG, provides a quarterly snapshot of the sourcing industry for clients, service providers, analysts and the media. Now in its 37th consecutive quarter, it is the industry's authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider metrics.
The 4Q11 Global TPI Index found that a year-end surge in the largest contracts boosted the outsourcing market in the fourth quarter. Mega-deal TCV rose 22 percent over the prior quarter and held steady year-over year, with four of the five mega-deal awards coming in EMEA. For the year, the lion's share of the mega-deals and their associated TCV came from that region.
Boosted by mega-deals, EMEA recorded the best performance among global regions. Fourth-quarter TCV in the region was up 12 percent year-over-year and full-year TCV was up 27 percent, to a record $55 billion. For the first time, significant outsourcing activity in EMEA was not limited to the established markets of the United Kingdom, Germany and Scandinavia, with momentum seen in France, Southern Europe and the Middle East.
SEE OTHER TOP OUTSOURCING STORIES IN THE SUPPLY CHAIN DIGITAL CONTENT NETWORK
The record in the other two regions was mixed. In the Americas, fourth-quarter TCV was up 22 percent year-over-year while annual TCV fell 20 percent from 2010. In Asia Pacific, fourth-quarter TCV fell 42 percent year-over-year while annual TCV fell 10 percent. However, both regions recorded their highest levels of contracting activity on record.
By scope, BPO continued its strong 2011 performance, with fourth-quarter TCV up 60 percent year-over-year and full-year TCV up 32 percent, to $29 billion. The 336 BPO contracts signed in the year was more than in any previous year, with much of the activity coming from the Financial Services sector.
Contracting activity in the IT outsourcing (ITO) segment also increased over 2010, by 8 percent, and is up 86 percent since 2005. TCV declined slightly year-over-year in the fourth quarter, and the full-year total of $66 billion represented a 6 percent decline over 2010.
Among industries, after underperforming the prior year through the third quarter, the Financial Services sector awarded a spurt of large contracts to push its 2011 TCV to $27 billion, its third-highest annual result on record. The 235 contracts awarded for the year was the highest ever for the sector.
In the Manufacturingsector, fewer contracts were signed yet TCV for the year increased. Off a smaller contract number and TCV base, Telecom & Media did very well in 2011, signing more contracts of considerably greater value.
“As we anticipated last quarter, the outsourcing market finished 2011 within historical norms, slightly outpacing our prediction for TCV, growth,” Keppel said. “Our prediction for the outsourcing marketplace in 2012 is continued growth in contracting activity of between 5 and 7 percent, led by Asia Pacific and BPO, with overall market TCV holding firm for the year.”
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”