Smaller, Shorter-Term Deals Shake Up IT Outsourcing Industry

It's not just cheaper prices pushing down IT outsourcing contract values. The 'new normal' for outsourcing presents risks and opportunities for customers and IT service providers.

By Stephanie Overby
Fri, February 07, 2014

CIO — IT outsourcing customers are signing more deals than ever before, but for less total value.

IT Outsourcing

The total annual contract value for deals signed fell 8 percent from $14.7 billion in 2012 to $13.5 billion in 2013, according to year-end analysis by outsourcing advisory firm Information Services Group (ISG).

"Clients are opting for the flexibility of smaller and shorter deals with more providers and are willing to take on the additional management and governance responsibilities that come with that model."
-- Kathy Rudy, ISG

That marks the fourth year of decline in contract values. Meanwhile the number of agreements signed continued to rise from 622 in 2010 to 793 last year, according to ISG. There were more than 1,000 small deals -- those in the $5 to $39 million-dollar range -- done in 2013 compared to 673 in 2008, ISG says.

[Related: 10 IT Outsourcing Trends to Watch in 2014]

The average amount spend per company has decreased by $6 million, and that's not just because IT services cost less today. "Part of it is cheaper prices," says ISG partner Kathy Rudy. "But the real key is that clients are focused on providers that can provide solutions that meet specific needs and are willing to go to multiple suppliers that can fill those needs in an optimal way, as opposed to taking a one-size-fits-all approach where a service provider is better in some areas than others."

But while customers are willing to take on multi-sourcing management, not all are necessarily able. "It's a mixed bag," says ISG partner Lois Coatney. "One key challenge is getting a lot of different suppliers with different agendas to collaborate on behalf of the client." Companies must invest in the appropriate people and mechanisms to manage their suppliers long term.

Bigger Deals Aren't Better for IT Outsourcing Customers

Large, single-sourced deals just don't work in today dynamic business environment. "Clients are seeing the impact that cloud and labor automation are having and they don't want to a big, long-term deal that locks them into a static solution that's going to become obsolete," Rudy says.

[Related: Does a Hybrid Offshore IT Outsourcing Model Make Sense for Your Company?]

"Clients are opting for the flexibility of smaller and shorter deals with more providers and are willing to take on the additional management and governance responsibilities that come with that model," Rudy says.

Infrastructure outsourcing in particular was the biggest contributor to the decrease in contract values while network services and application development and maintenance (ADM) work increased slightly both in terms of deal values and counts.

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