In 2004, Europe accounted for approximately half of all outsourcing deals signed, for the first time overtaking the Americas as the largest market by contract value and number of deals. It is now the biggest regional market opportunity in the world for outsourcing. This is an opportunity for players from all over the world to capitalise on, but it is of particular importance to European-based companies, be they providers or clients. There has never been a better time to develop a sourcing strategy embedded in the specific business and regional market requirements of the European organisation.
What is the impact of this market shift for service providers?
In the outsourcing industry, it has always been assumed that, as soon as outsourcing begins to become a common occurrence in Europe, the fate of the local service providers will be sealed. IBM, EDS and other big US brands will prevail and local IT service champions will disappear because the US brands have the size and scale required to meet the financial burden of large-scale, cross-border engagements that Europeans struggle to compete with.
If you look at the top 20 outsourcing service providers in Europe (determined by European outsourcing revenues), then it is certainly true that the number one spot is taken by IBM and the number two spot by EDS. However, beyond the dominance of those two, the field remains open to European players to step up to European top five ranking (currently Atos Origin, T-Systems and CSC are in the top five, although some way behind IBM and EDS). Indeed, 13 of the top 20 outsourcing companies in Europe remain European-based.
Several European players illustrate the point that pan-European operations can be successfully assembled acquisitively by building out from strong national roots within one European country market. Atos Origin, Capgemini and TietoEnator are good examples of this route to growth and success in the European outsourcing landscape.
If the market opportunity is now present in Europe in terms of sizeable deals (worth multi-million euros), and some local players are already showing real pan-European capabilities, does this mean that there is a long-term future for larger European service providers to compete with and seriously challenge the US heavyweights?
A big advantage that US players have is that they can grow to scale in a homogeneous, single domestic economy, whereas Europe remains pluralistic and heterogeneous in scope, despite the EU. However, European players have made significant strides lately in terms of successful cross-border selling within Europe.
The following deals are just a select few that indicate this:
- December 2003 – Capgemini wins £3 billion Aspire contract from EDS and Accenture
- October 2004 – SBS wins a ten-year, euro2.7 billion IT outsourcing deal with the BBC
- October 2004 – Atos Origin wins a large IT outsourcing deal with KarstadtQuelle, acquiring a large part of its captive operation Itellium
- October 2004 – LogicaCMG wins an IT outsourcing deal with Electricidade de Portugal (EDP) to acquire Edinfor.
It is a little early in 2005 to tell what the overall annual trend will be, but certainly in 2004 (compared with 2003), US players began to lose European market share to local players such as Atos Origin, Capgemini and SBS. Indeed, the market is undergoing significant restructuring to address European user concerns. This restructuring is characterised by:
- selective outsourcing, whereby a large number of smaller deals need to be negotiated separately
the delivery of business value via transformational deals
- cross-border engagements
- the use of labour arbitrage to address regional business needs.
Anecdotal evidence with end-user organisations and suppliers suggests that there are five main reasons why local players are being successful in the market.
- Pan-European reach, local touch – European companies can deliver solutions and services with real local attitude and style that the European sales teams of US companies often struggle to offer. This is particularly key to winning high profile bids (especially in the public sector) as well as for successful bids for projects financed by the EU.
- Multi-sourcing and the power of partnering – you can put it down to old world cynicism but continental organisations prefer to pick best-of-breed suppliers and manage them via multi-sourcing deals. Consequently, those companies that style themselves as one-stop shops and prefer to lead single-source deals are out of step. Moreover, partnering to develop service value chains is key to going down-market to sell to SMEs (the vast majority of the European business ecosystem).
- Market demand for selective outsourcing – this challenges the growth expectations of US players geared for larger deals, whereas European providers have the business models in place to support mid-sized deals.
- Short reporting lines to decision-makers – European customers want to feel that they are close to the strategic decision-makers within their supplier organisation. If European supply-side deal brokers frequently appear to be awaiting instruction from the US central office, many customers will begin to feel too divorced from the centre of power. Although US providers are addressing this, European providers enable all decisions to be taken in Europe, while US providers address certain risks outside of Europe.
Agile and adaptive in supporting customer demands – ironically, the European outsourcing market is showing an appetite for on-demand, agile and adaptive offerings, but there is some evidence that they are not impressed with US-developed portfolios carrying this type of branding. European providers have fine-tuned their go-to-market processes to leverage local market heterogeneity, whereas US providers tend to adopt more standard US-developed go-to-market approaches that deliver mixed results in the European market.
In conclusion, the European market opportunity for outsourcing is rightly under the business development spotlight of many companies. The market remains highly fragmented. While individual regions are at different levels of maturity and are maturing at different rates, we expect the French and central European markets to yield strong growth over the next two to three years. The challenge for European players is whether they have the confidence to fully exploit this opportunity. The challenge for players from the US is whether they can successfully adapt to local conditions. Meanwhile, our recommendation to user organisations is not to be dazzled by global branding, but to look for the best fit for your specific business requirements.
Dr Katy Ring is Practice Leader, Outsourcing within Ovum’s IT Services analyst group. She can be contacted on [email protected]
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