In the last quarter, European businesses are calculated to have signed under a third of the value of outsourcing deals that they signed in the previous three months, as the credit crunch dents IT spending.
Figures released by sourcing advisory firm TPI show that in the third quarter of this year, companies in Europe, the Middle East and Africa, signed 56 contracts totalling almost £3.44 billion (US$5.9 billion), much less than the 75 contracts totalling £11.59 billion signed in the previous quarter.
Duncan Aitchison, president at TPI EMEA, said the decline was partly because of the high expenditure in the previous quarter. "It seems likely that the sharp decline in outsourcing in EMEA in the past quarter is a temporary pause following the most intensive nine months of outsourcing activity in the region's history," he said.
"We are aware of several large transactions already underway in Europe and, therefore, expect to see a stronger performance in the fourth quarter."
Globally, only one mega deal of over €800 million (£626 million) was signed, compared to over €7 billion (£5.4 billion) in each of the previous three quarters. Some 128 contracts of smaller sizes were signed, totalling €11.5 billion (£9 billion), the lowest value in six years, according to the TPI Index.
But TPI said 2008 would still see more spending on outsourcing than last year's €68 billion, boosted by a deal between Tata and Citi that sees the Indian outsourcer buy Citigroup's business process outsourcing arm for $505 million (£290 million).
"Third quarters are traditionally weak, and looking ahead, we see considerable activity in the market," explained Aitchison.
Butler Group senior analyst Maxine Holt voiced similar sentiments, stating the Tata and Citi deal was an "important milestone passed on the hill-climb of the top Indian BPO vendors".
"It is only a matter of time before new deals are announced, and the desire to take reliance away from the US market and increase business elsewhere means that providers serving European organizations could well be acquisition targets," said Holt.
As the world banking crisis continues, "there may well be some rich pickings for overseas service providers who want to acquire similar organizations that are currently finding the going tough," she said.
Outsourcers catering for the financial services sector felt the pinch more during the current downturn, due to their limited scope of services rather than shorter contract durations, TPI said.
The average total contract value of a financial services sector outsourcing contract in EMEA fell by 37 percent to €107 million so far this year. The banking sector has experienced a decline of 62 percent in total contract valued signed in EMEA since January this year, while the insurance sector saw a 34 percent fall.
TPI said IT restructuring, as banks merge, would likely drive some outsourcing expenditure in the short term.