Demise of the Outsourcing Mega-Deal?
While EDS's recent billion-dollar contract win may not be an indication that outsourcing mega-deals are back in style, the reports of the death of the long-term, asset-heavy, single-provider deals are somewhat exaggerated.
Mon, April 06, 2009
CIO — The outsourcing mega-deal is dead! Long live the outsourcing mega-deal! Industry observers have prophesied the demise of mega-deals—those billion dollar, multi-year, single-source IT services contracts—time and again. And each year, big deals are signed anew.
The latest billion dollar baby—a ten-year, $1 billion contract inked between Aviva and now HP-owned EDS—was announced just a couple of months into the new year. But that doesn't mean big deals are back in style.
By all three relevant measures—total number signed, total contract value, and annual contract value—outsourcing mega deals have more or less flat-lined over the last few years. The portion of the overall market historically comprised by the largest contracts followed historical patterns, says Peter Allen, partner and managing director of Houston-based outsourcing consultancy TPI.
Most tellingly, the latter half of 2008 saw a significant slowdown in the awards of giant contracts. Just three mega deals were signed at a grand total of $6.5 billion, while customers signed twelve billion-dollar-plus deals worth $17 billion in the first half of the year. The total contract value of done deals dropped 20 percent and the annual contract values fell 25 percent, according to TPI. "There has not been such a drop in total contract value in the past ten years," says Allen, noting that deals are usually spread relatively evenly over the course of twelve months.
While the big fish of the outsourcing pond may represent just a drop in the bucket of the larger outsourcing market—2.5 percent in 2008—few expect the market for asset-heavy, comprehensive outsourcing deals to dry up altogether.
"All the data I've seen and client contact I have suggest that there will continue to be a stream of large outsourcing deals," says Dr. Paul Roehrig, Forrester Research principal analyst of IT sourcing and vendor management. "And as economic pressures continue to mount on firms all over the world, the overall number of deals might even increase some over the next 18 to 24 months."
There can be significant downsides to these big deals for both buyer and vendor. Providers report that mega-deals are costly to pursue, complex to manage, and hard on profit margins, says Blackmore, adding that this is why the signing of such deals tends to be cyclical in nature.
And Forrester data shows that client satisfaction is generally lower for comprehensive outsourcing contracts. Customers that impose their legacy processes, systems and applications on the provider are often disappointed by results. "This form of 'lift and shift' approach limits the ability of the provider to deliver substantial cost improvements through standardization and simplification," says TPI's Allen. Good deal architecture, implementation, and ongoing governance—important for any IT services relationship—are even more vital for big, single-source deals, adds Forrester's Roehrig.