European IT Services Market Bumps Along BottomEuropean IT Services Market Bumps Along Bottom

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The U.K. was one of the few bright spots in a dismal" global IT services market in 2012, according to analyst group Ovum.

"There is a clear contrast between the Eurozone and non-Eurozone economies when it comes to IT services," Ed Thomas, senior analyst in the Ovum IT Services team, told information U.K. "The U.K. is one of the parts of the former that is actually standing up pretty well, driven by government department outsourcing deals and [British IT services firm] Serco's £275 million ($415 million) outsourcing deal with Aegon," Thomas said.

But such wins stand out in stark contrast with what has been a down market for years now. In its just-published analysis, Ovum says it was worst performance in worldwide IT services contract activity since 2002.

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The slump was particularly notable at the end of 2012, which was down 34% in total contract value (TCV), and with contract numbers slipping 17% from the same three-month period 2011, according to Ovum. That means annual IT services contract activity fell to its lowest level in 10 years, both in TCV and deal volume. Ovum said that particularly striking was the fourth quarter's lack of "megadeals" -- deals worth over a billion dollars.

For 2012 as a whole, annual TCV was less than the previous 12 months across both the public and private sector, with the private sector enduring its worst year since 1998. "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," said Thomas.

That's being compounded by the fact that public sector activity has cooled as well, 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.

On a sector basis, the sharpest fall was in services, where the number of deals announced fell by 50%, followed by healthcare (slumping 39%) and financial services (18%). However, contract activity in 2012 was up for telecommunications and technology.

Europe was the leading market for private sector contract activity in 2012, with 45% of annual TCV. However, TCV generated by European services and outsourcing vendors still fell 31%, to $16.7 billion. By contrast, North America, having slumped dramatically in 2011, rebounded in 2012, finishing the year up 48% at $10.5 billion, shaped by big awards by firms such as Procter & Gamble.

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Thomas cautioned that it's too early to tell whether this represents a significant shift from North American customers, who he says have been wary of committing to major projects in recent years due to economic turmoil.

What should CIOs take away from these poor IT services numbers? Thomas says that it's less that customers have the upper hand over weak suppliers desperate to close deals, and more that the playing field has become more level. For instance, he believes customers are taking advantage of greater outsourcer flexibility in bundling services -- applications, infrastructure support and business process outsourcing -- into one contract. He also thinks customers are driving IT services suppliers to offer shorter contracts, of three to five years instead of five to seven.

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