Automation is Causing a Sharp Decrease in Outsourcing Contract Value

Thanks to the growing popularly of automation and robotics, outsourcing deals are decreasing in terms of contract value. According to the Information Services Group (ISG), the average annual contract value (ACV) of outsourcing deals fell by 18% to US$5.1 billion, in the first quarter of this year, well below the average $6 billion in first quarters since 2006.

The research firm has predicted that the explosion of new technologies and delivery models will push prices down in the months to come to levels not seen since the early 2000s.

The total number of first-quarter awards, 305, was down 7% from the previous year. Larger deals (those worth more than $30 million annually) declined by 25% both in number and value, while the volume of smaller deals continued to flow steadily.

“Smaller deals continue to flow, and value and volume for the trailing 12 months remains in positive territory. Still, what goes up must come down, especially against the strength of last quarter and the vigorous start the industry had in the first quarter of 2014,” said John Keppel, partner and president of ISG.

Although the IT outsourcing industry started slowing down about ten years ago, 2014 saw a huge growth in terms of both value and volume. The latest report from ISG will however frighten the industry associates. Already, stock prices of most of the Indian IT outsourcing firms have been decreasing rapidly.

“The unprecedented change brought about by ARC (automation, robotics and cloud) and technology innovation is creating substantial opportunity but also substantial risk. Clarity of leadership and strategy will be required to navigate these turbulent waters,” Keppel added.

“While we are used to the ever-present competitive dynamics of the sourcing marketplace, even by our own industry’s standards we are currently witnessing some marked shifts in pricing across a number of areas as the compounded impacts of Automation, Robotics and Cloud take hold.”