Rising Traditional Sourcing Contracts Lift Asia Pacific Sourcing Market

A rise in the number of traditional sourcing contract signings has lifted the Asia Pacific sourcing market to its most successful quarter ever, according to the findings of the 2Q17 ISG Index released by Information Services Group (ISG).

The ISG Index, which measures commercial sourcing contracts with annual contract value (ACV) of US$5 million or more, shows the combined commercial market in Asia Pacific (including both as-a-service and traditional sourcing) reached US$1.34 billion in the second quarter, up 24 percent year on year. It was the fifth successive quarter in which the region's ACV exceeded US$1 billion.

Driven by a record 66 contracts in the quarter, with stepped-up activity in Japan and China, especially, traditional sourcing ACV rose 11 percent, to US$659 million, the highest spending since the fourth quarter of 2014. As-a-service spending reached US$679 million, the second-best quarter ever, up 42 percent from the prior year.

For the first half, combined spending reached US$2.4 billion, up 20 percent year on year, propelled by a record US$1.4 billion in ACV from the as-a-service segment. Traditional sourcing, meanwhile, slid 6 percent to US$1 billion.

As-a-service spending was driven by US$1.2 billion in Infrastructure-as-a-Service (IaaS) ACV, up 64 percent, offset partially by a 4 percent decline in Software-as-a-Service (SaaS) ACV, to US$216 million.

In traditional sourcing, information technology outsourcing (ITO) spending, at US$878 million, was up 43 percent, while business process outsourcing (BPO) spending, at US$136 million, was down 70 percent.

Best half-year performance for business services

By industry, business services had its best half-year performance ever, generating combined ACV of US$431 million, up 41 percent, with as-a-service spend accounting for the lion's share (87 percent) of that total.

Financial services contributed a similar level of spending – US$449 million – up 41 percent in the first six months, with just over half of that spending coming from as-a-service sourcing.

Manufacturing ACV, meanwhile, remained relatively stable in the half, with as-a-service spending surging 50 percent over the same period last year, but with most of that growth offset by a decline in traditional sourcing spending, down 24 percent.

Telecom and media, traditionally Asia Pacific's largest sourcing market, saw its ACV drop 34 percent in the first half, despite 30 percent growth in as-a-service spending. The sector's decline in traditional sourcing reflects the industry's move away from data centers and its growing focus on vertical integration of content and connectivity solutions.

Globally, ACV for the combined commercial market stood at US$9.3 billion for this quarter, up 9 percent over last year, but down 11 percent from the record first quarter of 2017. During the quarter, as-a-service ACV climbed 32 percent, to US$3.8 billion, while traditional sourcing ACV declined 3 percent, to US$5.5 billion.

"Companies in Asia Pacific have been quick to harness the benefits of as-a-service contracting and are using these new technologies alongside more traditional forms of sourcing to deliver cost reduction and improved customer experience," said Lisa Borden, partner and head of ISG Australia and New Zealand (ANZ).

"Looking ahead to the rest of 2017, we forecast double-digit growth in the as-a-service segment in Asia Pacific, while traditional sourcing is expected to remain flat."