British outsourcing market shrank by more than a quarter in 2018 - ISG

EDINBURGH (Reuters) - The British outsourcing market shrank 27 percent to 2.5 billion euros (£2.2 billion) in 2018, weighed down by uncertainty around the nation's decision to leave the European Union, research firm Information Services Group (ISG) said on Friday.

In Europe, the Middle East and Africa (EMEA) traditional business services contracted out to the sector, providing work for companies such as Capita, Serco and Mitie, rose 9 percent year-on-year however to 12.9 billion euros in 2018.

Within that, traditional services which do not require cloud computing shrank 6 percent but other services which do expanded by almost half to 4.9 billion euros, the research found.

The collapse of British contractor Carillion a year ago was a high-water mark for the sector, forcing the government to step in to guarantee services ranging from road-building to school meals. It sparked public debate about the extent to which private firms should run essential public work, and exacerbated poor investor sentiment around the sector.

A trend towards a more fragmented market was also confirmed, with a 5 percent increase in the number of individual contracts in the UK.

"Even though the macro environment is more volatile now than a year ago, demand for sourcing remains strong," said Steve Hall, head of ISG. "We believe the industry will see an accelerating growth trend in 2019, driven by a growing appetite for digital transformation, even in the face of unforeseen macro-economic challenges."

Since the June 2016 Brexit vote, Britain's traditional outsourcing market has slumped, ISG data showed.

Prior to the vote, the UK averaged three 800-million-euro quarters for traditional sourcing per year. Since then only one quarter – the first quarter of 2017, which included the signing of exceptionally large deals – reached that mark.

The EMEA ISG Index, which measures commercial outsourcing contracts with annual contract value of 4 million euros and above, showed that in the fourth quarter alone the overall EMEA outsourcing market grew 5 percent to a value of 3.0 billion euros year-on-year.

(Reporting by Elisabeth O'Leary; editing by Stephen Addison)