Out-Law News | 27 Jan 2016 | 4:26 pm | 2 min. read
Diane Mullenex, a specialist in telecoms and IT contracts at Pinsent Masons, the law firm behind Out-Law.com, said the trend was reflected in new figures on the size of the outsourcing market across Europe, the Middle East and Africa (EMEA).
"The sourcing market in the Middle East is not as mature as in other parts of the world, owing in part to the fact that there has traditionally been a practice among organisations present in the region to carry out tasks internally or through special purpose vehicles with partner organisations rather than to outsource them," Mullenex said. "However, there are two main factors that are beginning to shift attitudes towards outsourcing."
"Firstly, the reduction in the price of oil has brought about price pressures in countries such as Saudi Arabia and forced local administrators to consider ways of making efficiency savings. Outsourcing is a generally accepted way of achieving this. In addition, across the region there are a growing number of public contracts, particularly in areas such as defence, which are being put out to tender as organisations seek to access the latest, most sophisticated and secure telecoms networks and communication systems in light of growing cyber risk they face."
According to the latest outsourcing index published by the Information Services Group (ISG), the cost of outsourcing and the length of outsourcing contracts are generally falling globally as a result of the move towards greater use of cloud services, digital technology and automation.
ISG said "cloud, digital and automation drive down average award values and contract durations" and that this had been reflected in the fact that it had seen "the lowest annual mega-relationship activity in 10 years" in 2015.
According to ISG, there are 3,114 "active" outsourcing contracts with an annual value of at least €4 million across EMEA. It said the EMEA outsourcing market in 2015 was worth €57.9 billion, up from €35.8bn in 2006.
Although ISG charted a rise in both the volume and value of outsourcing agreements concluded in the final three months of 2015, it said that overall figures for the year showed the market had shrunk compared to 2014. Last year there were 601 outsourcing deals struck in EMEA, down 7% on 2014, and the total annual contract value of those deals was also down 8% on the previous year at €9.4bn.
There was a record high number of outsourcing contracts concluded in the UK in 2015, ISG said. However, it said the total annual value of those deals was down on 2014 figures.
Despite the weaker performance on 2014 levels, the total value of outsourcing contracts concluded in EMEA in 2015 accounted for nearly half of the total value of all outsourcing agreements struck in the world last year (€19bn), according to the ISG figures.
Across the globe, ISG reported a 12% reduction in the value of IT outsourcing contracts concluded in 2015. IT contracts expert Sarah Cameron of Pinsent Masons, the law firm behind Out-Law.com, said this reflects the "continuing shift to smaller deals" being seen in the market.
"Although there are some record counts, the annual contract value is still falling off," Cameron said. "The bulk of this is down to the fall off in IT outsourcing because of the shift to cloud. This shows the continuing trend of digital transformation disrupting the traditional outsourcing market."
"There has been a general reduction in recent times of so-called 'megadeals', however the ISG research charted the fact that some major deals struck in the latter months of 2015 helped boost EMEA market performance. However, these megadeals were not enough to buck the overall downward trend in the market," she said.
According to ISG's report, the average length of outsourcing contracts agreed in 2015 was three and a half years. In 2006, the average contractual period was five years. ISG's figures also showed that the average annual value of outsourcing contracts put in place in 2015 was €13.1m, down from €19m in 2006. However, the number of outsourcing contracts agreed globally last year was, at 1,445, more than double the 741 deals recorded in 2006.