This week NelsonHall held its quarterly IT Outsourcing (ITO) Index webcast to report on the latest developments in ITO contract activity and present an analysis of spending activity for IT services, professional services (i.e. consulting and systems integration) and ITO.

Background

ITO Index data shows a steady (but non-linear) decline in Total Contract Value (TCV) from 2002 onwards. The level of new-scope contracts declined from ~80% towards ~40%, signaling fewer new deals. Then came the subprime-driven recession of 2008-9, which triggered a vast level of ITO renegotiations, and a further reduction in new-scope contracts. The ITO market has also been impacted by offshoring, with very significant reduction in prices and TCVs, and increasingly by cloud computing (and in particular public clouds).

What does our short-term spending analysis tell us?

Spending in IT services has continued to grow, albeit at low levels (~2% in Q4 2014 and about the same during full-year 2014). Growth is driven by professional services (+3% in Q4 2014 and ~4% full-year). ITO spending growth was slightly negative in Q4 2014: it has been since Q1 2013. This is a bit of a surprise: when we did our initial spending analysis and estimates three months ago, we expected flat ITO spending in Q4 2014, not a (small) decline.

What does our 12- to 18- month bookings quarterly analysis tell us?

During 2014, ITO bookings were flat across geographies, including North America and Europe. Activity in fast-growth countries (India, Brazil, China) was anecdotal. In Q1 2015, growth in bookings was significant at +40%, driven by Europe. Activity in North America was stable and activity in fast-growth countries was limited.

An important KPI is the level of new-scope contracts (as opposed to existing scope contracts), and an estimated 72% of contracts with a TCV over $100m were new-scope in Q1 2015. The level of new-scope contracts varies from quarter to quarter significantly and therefore we cannot read too much into Q1 2015’s high level of new-scope contracts. However, it is worth pointing out that the level of new-scope contracts has gradually increased from 30% in 2012 to 40% in 2014. Q1 2015 therefore fits well with this trend towards a higher level of new contracts.

NelsonHall’s forecast for 2015

Despite Q1 2015 bringing good news in its three main KPIs (better economic conditions, contract bookings in dollar terms, and percentage of new-scope contracts), we believe the outlook for IT services in 2015 remains mixed.

Indian offshoring will have a continued deflationary impact on prices and spending across IT services. To a lesser extent, public cloud computing is also impacting spending in server management and datacenter services. Both adoption of offshoring and public cloud is accelerating: evidence of contracts has expanded from Nordics and the Netherlands to Germany, and adoption of public IaaS is also accelerating in the U.S. primarily, but also in Europe.

We are therefore predicting limited higher growth in IT services spending overall (2.5-3.5%), professional services (4-5%), and ITO (1-2%).

You can listen to a recording of this week’s ITO Index webcast here. NelsonHall regularly blogs about the ITO industry here.

You can register for the next ITO Index webcast scheduled for July 2nd, 2015 here.