STAMFORD, Conn., Jan. 16, 2014 /PRNewswire/ -- Information Services Group (ISG) (NASDAQ: III), a leading technology insights, market intelligence and advisory services company, said today that global outsourcing activity rose sharply in the fourth quarter, even as contract values fell as part of a trend toward smaller deals.

Data from the ISG Outsourcing Index, which measures commercial outsourcing contracts with annual contract value (ACV) of $5 million or more, showed the number of contracts awarded during the fourth quarter of 2013 climbed by 13 percent, while ACV dropped 12 percent, to $4.6 billion. For the full year, the number of awards edged up 2 percent, but values fell 18 percent, to $18.7 billion. In all, 309 contracts were awarded in the fourth quarter, while 1,155 contracts were awarded for all of 2013, both in line with the totals of the previous two years.

ISG attributed the drop in value to a number of factors, among them a fall-off in the number of "mega relationships" (those with ACV of $100 million or more); a sharp decline in activity within the manufacturing sector and, to a lesser extent, financial services; weakness in business process outsourcing (BPO), and a general trend toward smaller deal sizes.

"The numbers we're reporting today, while disappointing, are in line with ISG predictions. On the surface, they show a fourth quarter that didn't come in strong enough to salvage a disappointing first half, but from a longer-term perspective, they are broadly in line with pre-recession market levels," said John Keppel, president of ISG. "In this post-recessionary period, we are beginning to see changes in demand for sourcing. Used principally as a tool for exploiting rapid cost-savings potential during the recessionary period, sourcing is now being used for strategic advantage as enterprises begin to move into growth modes."

For the year, areas of particularly strong deal activity were contract restructurings, up 22 percent, as more enterprises converted long-term deals with a single supplier into shorter-term contracts with multiple providers; information technology outsourcing (ITO), up 8 percent, especially in the applications development and maintenance (ADM) space; and the EMEA region, which saw contract counts jump 18 percent, albeit with smaller average sizes.

The number of contracts awarded in the $5 million to $39 million range continued to predominate, but average contract size across all bands continued to trend downward.

In terms of value, restructured contracts held steady for the year, with ACV of $7.5 billion, but new-scope ACV fell 27 percent, to $11.2 billion.

Across industries, the manufacturing sector saw the steepest drop in value, with ACV off more than $2 billion from the prior five-year average and 47 percent for the year. Financial services was down 15 percent, but was flat with its five-year average ACV. The pull-back in both of these sectors comes after several years of strong performance. Travel, transport and leisure, on the other hand, saw its ACV climb 56 percent in 2013, while the energy and healthcare and pharmaceutical sectors recorded slight gains.

The value of ITO contracts in the fourth quarter rose 8 percent from the prior year, but despite strength in ADM, full-year ACV was down 8 percent, as a drop in manufacturing ITO pulled overall contract value down.

BPO saw a substantial decline in ACV for both the fourth quarter and the year, largely because of a fall-off in large contract awards from 2012, when a number of mega deals were awarded, especially in Europe. Adding to the downward pressure was a steep drop in facilities management and corporate real estate awards. The biggest area of BPO was in industry-specific sourcing, which represented 27 percent of total ACV for the year.

By region, EMEA posted a record 587 contracts in 2014, although full-year and fourth-quarter ACV were both down slightly. Importantly, the region's ACV, at $10.2 billion, remained above the $10 billion mark for the fourth consecutive year, bolstered by growth in restructured and ITO contract values. For the year, all sub-regions were essentially at or above their 2012 ACV, except for the UK and Ireland, which tailed off because of lack of large BPO deals, even as overall deal count rose 13 percent.

In the Americas, ACV of $6.5 billion was down more than 25 percent from 2012, due largely to soft demand from the manufacturing and financial services sectors. The telecommunications and media sector, however, was up 31 percent, while healthcare/pharmaceutical and energy recorded smaller gains.

Asia Pacific saw only a moderate drop in ACV for the fourth quarter, but the full year was a different story, as ACV dropped 40 percent compared with an extraordinarily strong 2012, in which there were a number of large BPO awards. Several of the largest markets suffered declines in 2013, notably India and Australia-New Zealand; Japan was the lone bright spot. The number of contracts awarded region-wide was off more than 10 percent.

"I believe 2013 represents a real inflection point for the sourcing industry," said Keppel. "Going forward, a number of significant forces will combine to shape sourcing in the post-recessionary world, among them the challenge of maturity and saturation in the large traditional markets and industries, a lack of penetration into the emerging markets for a number of major global players, ever-increasing competition, and a decline in the cost of sourcing. We will see a continued shift from West to East, and further growth in under-penetrated industries, market segments and geographies. Those providers that embrace automation and standardized solutions to drive down operating costs will be the ones best positioned for growth, as margins, rather than revenues, become the new benchmark for success."

For the first half of 2014, Keppel said ISG is looking for positive results across the broader market, based on a strong industry pipeline and a softer comparison with a weak first half of 2013. The company forecasts growth in ACV of between 3 percent and 5 percent for the first six months of this year.

Now in its 45th consecutive quarter, the ISG Outsourcing Index (formerly the TPI Index) provides a quarterly review of the latest sourcing industry data and trends for clients, service providers, analysts and the media. For more than a decade, it has been the authoritative source for marketplace intelligence related to outsourcing transaction structures and terms, industry adoption, geographic prevalence and service provider performance.

The 4Q/FY 2013 ISG Outsourcing Index was presented during a conference call and webcast for media and analysts today. To listen to an audio replay of the call and view presentation slides, please visit http://www.isg-one.com/web/research-insights/isg-outsourcing-index/.

About Information Services Group
Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory services company, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private and public sector organizations to transform and optimize their operational environments through research, benchmarking, consulting and managed services, with a focus on information technology, business process transformation, program management services and enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, the deepest data source in the industry, and more than five decades of experience of global leadership in information and advisory services. Based in Stamford, Conn., the company has more than 800 employees and operates in 21 countries.

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