Why IT Outsourcing Deals Are Getting Smaller
IT outsourcing deals are getting smaller, particularly in the U.S., as companies are loath to invest the big bucks required for large contracts, according to research by outsourcing consultancy TPI. But that's not the only reason.
Wed, July 27, 2011
CIO — IT outsourcing deals aren't what they used to be.
The total contract value of outsourcing agreements signed during the first half of 2011 dropped roughly 20 percent compared to the same period last year, according to outsourcing consultancy TPI. IT-specific deals, which typically buoy the larger services market, were down 18 percent compared to the second quarter of 2010. In fact, large deals contributed less to the total contract value of the market than ever before, according to TPI. The shift to smaller deals had the greatest impact in the Americas where contract values were down 50 percent, both compared to the same quarter and year-to-date in 2010.
The total number of outsourcing contracts signed, however, was virtually unchanged— down 1 percent compared to last year, according to TPI.
The dominance of smaller deals is due in part to companies' reluctance to make the larger investments required for bigger contracts, says John Keppel, TPI's president of information services. Just one, billion-dollar-plus IT outsourcing deal was signed during the quarter.
The lack of big bang outsourcing contracts is also a sign of outsourcing saturation. "The market in the U.S.—particularly around the IT area—is mature," Keppel says. "Penetration rates into the largest of the Global 2000 organizations in each industry group is pretty high, so it is less likely that we will see large, new scope IT transactions coming to market."
Instead, growth will come from mid-market IT and business process outsourcing, which will produce smaller transaction values. "Even though positive growth is possible," Keppel says, "there will still not be a return to prior levels of large deals entering the market."
Smaller deals also point to outsourcing customers' continued preference for multi-sourcing arrangements over single-sourced deals. Companies like the many-partnered model because it allows them to access specific skills and can provide some internal market competition for services, says Keppel.
"Organizations can chose from a panel of approved providers [for a specific type of work], which means they can effectively run a competitive bid process for certain projects to ensure they are getting some elements of the external market competition, rather than limited choice," he says.
However, managing the multi-sourced environment continues to be a challenge for some customers. "Maintaining control and oversight of delivery and ensuring that the business users are getting what they need, whilst the value is extracted from the original transaction, can present a real conflict," says Keppel.
Notably, it is often the most seemingly straightforward aspects of vendor management that trip them up, like contract administration and invoice management.