Although the number of new contracts for Procurement Outsourcing (PO) services declined in 2008, strong interest and expansion of existing contracts sustained a 30% annual growth rate, according to an Everest Research Institute study of the procurement outsourcing (PO) market.

Annual contract value of PO spend surpassed the $1 billion mark in 2008, with large companies signing 54% of new contracts.

Companies signed fewer multi-process PO contracts in 2008 as were signed in 2007; however, market growth was evident as suppliers` managed, non-core PO spend was up $16 billion over the previous year, crossing $110 billion, according to the Institute`s study, Procurement Outsourcing (PO) Annual Report 2009: Shifting Buyer Preferences Dictate New Engagement Models.

Last year saw the emergence of a more granular process and category scope in multi-process PO contracts, along with the doubling of the number of single-process contract signings. The manufacturing sector, most notably consumer product companies, was a key growth driver last year; whereas, transaction activity slowed in the financial services sector.

"Last year`s drop in new contract spending is the result of a changing buyer approach, not a lack of interest in PO," said Katrina Menzigian, Vice President, Everest Research Institute. "The average size of multi-process contracts nearly halved last year as buyers began adopting a cautious, phased approach, but expansion of existing contracts and increased signings of single-process contracts were significant drivers of market growth.

Looking forward, a significant value creation opportunity is coming for buyers as nearly 45%
of contracts in the PO market are coming up for renewal over the next few years that are worth more than $1.3 billion in TCV."

Other highlights of the annual report include:

* Offshore adoption has increased significantly across procure-to-pay (P2P) as well as sourcing-focused contracts.
* Nearly half of all PO buyers leveraged supplier-owned IT systems; about a third also leveraged supplier-provided add-on tools.
* End-to-end PO suppliers Accenture, IBM, and ICG Commerce hold nearly 80% of market share. IBM accounted for 70% of new TCV signed last year.
* Top P2P-focused performers in 2008 were Wipro, Infosys BPO, and EDS-HP.

"Suppliers need to focus on pursuing organic growth opportunities, leverage finance and accounting outsourcing (FAO) to expand into PO services and create differentiation through strategic use of global sourcing," said Saurabh Gupta, research director, Everest Research Institute and co-author of the report. "Delays in decision making will continue and challenges will temper the rate of source-to-pay adoption. Combined with emerging phased adoption, PO suppliers should expect the continuation of lengthy sales cycles and complex buyer decision-making processes."