How Different Are The Rules for Billion Dollar Outsourcing Deals?

The mega deal is dead. Long live the mega deal!

For several years, we’ve been hearing about the demise of the billion-dollar-plus outsourcing deal. The shift is toward multi-sourcing, we’re told. Buyers want best-of-breed, analysts say. No one wants all their IT eggs in one basket, advisors tell us. (I wrote about the end of the billion-dollar deal back in 2003!)

Yet, every several months, I get a press release from an IT services provider who’s somehow managed to ink another “mega” deal.

I got one this summer: “IBM Signs $1.4 Billion Global Strategic Outsourcing Agreement With AstraZeneca.”

The IBM-AstraZeneca deal was actually a renewal/renegotiation. That lines up with Everest Research Institute‘s IT outsourcing predictions for 2008, which stated: “We are… likely to see further decline in mega-deals, both in terms of number and the size. As fewer mega-deals get announced most of the play in the mega-deal segment will shift to renewals and re-competes.”

But if best-of-breed multisourcing is actually the “better” option and megadeals are destined to go the way of the dodo, why are companies like AstraZeneca re-upping on their monster, single-source deals?

Part of it may be that once you’re locked into one of these deals for five years, it’s too painful and costly to reverse course. (Check out, “The Pain of Backsourcing” for some gory details.)

But the other reason may be that the perks that accrue to a multi-billion dollar customer are just too good to pass up. Want to see IBM or EDS really turn on the charm? Invite them to bid on soup-to-nuts deal for a Global 500 company.

I got to talk to Sean Keaton, a partner in the London office of international law firm Milbank, Tweed, Hadley & McCloy, who advised AstraZeneca (and issued its own press release on the deal).

Not surprisingly, Keaton was largely mum on deal specifics. Lawyers and their NDAs!

But he did say that IBM was willing to agree to several stipulations “very specific to AstraZeneca” that “IBM would be loathe for me to talk about publicly.” Keaton said this was a “testament to the flexibility” of the incumbent vendor.

Or a testament to lengths an outsourcer will go to in order to woo a company like AstraZeneca into another mammoth deal. (The pharmaceutical company had originally signed on with IBM back in 2002.)

Keaton says AstraZeneca had some difficulties back then letting go of the services outsourced to IBM. “When you’re outsourcing for the first time, there’s a lot of unease and elements of uncertainty.” says Keaton. Thus AstraZeneca did a lot of micromanaging in the early days, which inhibited IBM’s’ ability to lower their total IT spend, says Keaton.

Not so on the second try. “A lot of the direction on how services will be delivered has been handed back to IBM,” says Keaton. “(AstraZeneca) is saying, this is what we want to achieve. How you do that is your responsibility. Off you go.”

Could be a great way to force innovation on the part of an IT services provider. We’ll see.

Keaton’s law firm says “this is among the first of a ‘new breed’ of outsourcing agreements based on desired outcome or ‘service effect’. This new style of outsourcing agreement allows the outsourcer greater autonomy on methods of delivery.”

The bottom line is this second deal is actually worth less in total dollar value to IBM (The 2002 deal was worth $1.7 billion). Yet IBM is still willing to agree to whatever AstraZeneca-specific terms Keaton is not allowed to talk about because (1) $1.4 billion isn’t chump change and (2) this is a global deal covering 70 locations.

What exactly IBM agreed to is anyone’s guess. What is certain is that this probably won’t be the last mega-deal announcement to arrive in my inbox.