Companies are responding to the effects of a tough economy by expanding their use of existing outsourcing agreements and awarding new contracts, according to the latest market data from TPI, the sourcing advisory firm.

TPI data reveals that 282 outsourcing contracts totaling over €39 billion have been signed so far this year – the strongest half year performance in 10 years. This represents an increase of 24 percent on the total value of contracts signed at this point last year. Demand for outsourcing is being driven by companies looking to cut expenditure and deliver variability in costs in the current economic climate. Corporate strategies that were growth-driven during more prosperous times are becoming profitability-driven in response to the economic challenges.

EMEA leads the way

Growth in the outsourcing market is taking place predominantly in Europe, Middle East and Africa region (EMEA). TPI data shows that the EMEA represents 61.5 percent of the outsourcing market to date in 2008 compared with 51 percent a year ago. So far this year. 126 contracts totaling €25.5 billion have been signed – up 58 percent on the value signed at this point last year.

Duncan Aitchison, partner and president, TPI EMEA comments, “European companies are expressing their concerns regarding the softening business climate by taking steps to reduce operating costs, and restructure the nature of their business-support functions to have a more variable cost profile. They are doing this to gain the benefits of near-term cost savings, but also to position themselves to respond more effectively when the economy strengthens and growth is once again at the top of the agenda.

“While I wouldn’t call today’s corporate attitude towards cost-reduction ‘desperate’, there is certainly a tone of urgency in play.”

Reflecting the increasing adoption of outsourcing by large European corporations, 10 of the 13 mega deals (contracts valued at €800 million or greater) signed so far this year were in EMEA. The average value of a contract in EMEA is growing in contrast to declining contract values in the US and Asia Pacific. This growth in contract values in EMEA is being fueled by this rise in mega deals.

What does the future hold?

TPI’s data shows unprecedented market momentum in terms of new outsourcing contract awards – the best sequential nine months in the history of outsourcing. To date in 2008, 237 new scope outsourcing contracts have been signed globally totaling €32.6 billion – an increase in total contract value of over 25 percent from 214 contracts totaling €26 billion a year ago.

Considering this strong start to the year, TPI estimates that global annualised revenue from outsourcing contracts will grow by around 10% to over €70 billion by the close of the year. This would surpass the €64 billion in 2007 and 2006.

“This surge in new scope outsourcing contracts indicates healthy market demand and underlines the fundamental momentum in demand for outsourcing,” explains Duncan Aitchison. “We could well see a record sum for the total value of outsourcing contracts signed in 2008. While third quarters are traditionally the softest for outsourcing contracts, we see little to disrupt the current momentum.”