Outsourcing Deals: The End of the Billion-Dollar Babies?

Billion-dollar-plus oustoucing megadeals -- once wildly popular -- are now viewed with skepticism.

Are we seeing the end of the single vendor, multibillion-dollar, 10-year outsourcing deal that was popular in the 1990s? Well, those deals aren’t extinct. But you won’t find any CIO bragging about how his $5 billion deal was a bust. And anecdotal evidence suggests those megadeals are now viewed with skepticism.

"We’ve had conversations with CIOs at companies that have had those big showcase deals, and they’re less inclined to re-up with their existing partners as is," says Tom Weakland, managing partner of the global sourcing practice at DiamondCluster International, a management consultancy in Chicago. "We’re still seeing big deals but not as many exclusive deals" because companies are opting to introduce multiple vendors into the mix.

Smaller deals are making up a larger percentage of the outsourcing market, according to Forrester Research’s December 2002 IT services study. Fifty-two percent of companies said they will spend less than $10 million on outsourcing in 2003, according to the Cambridge, Mass.-based research company.

The problem with the megadeal? While the single vendor approach does have potential benefits (lower costs, convenience), it puts all the risk in one basket. And a single vendor isn’t always the best choice for every possible IT function.

Procter & Gamble, for example, decided not to go ahead with an $8 billion business process outsourcing deal with EDS, deciding it would probably take a handful of vendors to manage the work.

"Companies are realizing that a one-size-fits-all approach to outsourcing doesn’t work," says Laurence Bunin, CEO of Handshake Dynamics, a consultancy in New York City.

And a lot can change in a 10-year deal. Shorter terms sound more manageable to CIOs such as Cecilia Claudio of Farmers Group. "I don’t think those global overarching types of deals are the best," Claudio says. "If I were to recommend doing that, I’d say do it over a shorter period of time. And understand exactly why you’re doing it."

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Copyright © 2003 IDG Communications, Inc.

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