IT services contracts activity at worst since 2002

Last year was the worst for IT services contract activity since 2002, according to research from Ovum. Performance in the three months to the end of December 2012 fell significantly below the levels seen in the same period of 2011, ensuring that annual IT services contract activity fell to its lowest level for 10 years, both in terms of total contract value (TCV) and deal volume.

In Ovum’s latest analysis of the IT services market the TCV of deals announced in the fourth quarter of 2012 was $20.8 billion, down 34 percent on the same period of the previous year. The number of deals fell 17 percent in the same period and there was a notable lack of mega-deals (contracts valued at $1 billion or more). While the level of activity in Q4 2012 represented a slight improvement on the previous three months of the year, with TCV up 10 percent from the third quarter of 2012, annual TCV was down on the previous 12 months across both the public and private sector, with the private sector enduring its worst year since 1998 in TCV terms.

“The ongoing economic uncertainty afflicting key markets for IT services such as the US and Europe was a major factor behind the weak performance of the industry in 2012,” says Ed Thomas, senior analyst in the Ovum IT services team. “Our research suggests that many enterprises remain wary of committing to major projects, with issues such as the Eurozone crisis having a particularly significant impact. In addition, public sector activity has reduced as many governments come under pressure to cut public spending in the face of high debt levels, leading to a general reluctance to get involved in large-scale IT services deals.”

The reluctance among enterprises can be seen across vertical markets, with the sharpest fall in the services sector, where the number of deals announced fell by half. In healthcare and financial services, contract volumes were down 39 percent and 18 percent, respectively. The only industries in which contract activity was up on the previous year were telecommunications and technology.

Regionally, Europe was the leading market for private sector contract activity in 2012, with 45 percent of annual TCV. However, TCV generated by European enterprises actually declined sharply during the year, falling 31 percent to $16.7 billion. Private sector TCV in North America, having slumped dramatically in 2011, rebounded somewhat in 2012, finishing the year up 48 percent at $10.5 billion.

“The last quarter of 2012 saw some notable awards from North American firms such as Procter & Gamble. However, it is too early to tell whether or not this represents a significant shift in approach by enterprises in the region, which have been wary of committing to major projects in recent years due to the economic turmoil.” concluded Thomas.