Midsize BPO Deals Are Stronger Than Ever
New research by independent market analyst Datamonitor and outsourcing advisory firm Everest Group revealed that the global outsourcing sector is increasingly being driven by midsize contracts, particularly in the BPO space. Datamonitor's IT Services Contract Tracker followed 1,814 outsourcing deals in 2004, a 4.4 percent increase over the 1,738 logged in 2003. The combined value of the 2004 deals rose by 37 percent in 2004, to $163 billion, compared to $118.9 billion the previous year.
Services Tracker is a comprehensive guide for contracts within the $600 billion global IT services market. The service tracks every new outsourcing, systems integration, and consulting deal with a value greater than $1 million signed by major IT service vendors, and contains information and statistics on more than 6,500 contracts signed during the past five years. IBM Global Services captured the largest market share, with deals signed in the central government sector growing 78 percent during 2004, ahead of Lockheed Martin and Accenture. There were also fewer megabillion-dollar deals in 2004 than in 2003.
These numbers agree with people in the services sector who claim that clients are adopting selective sourcing models, where they outsource specific IT and back-office functions to specialist outsourcing vendors, rather than hand over their entire IT department to a single supplier.
"There was a trend for clients to look to sign medium-sized deals, which we classify as being $100 million up to the billion-dollar mark," says Nick Mayes, lead analyst for Global Computing Services at Datamonitor. "Also, one feature we noticed in the service market was that the deals were distributed among a larger number of vendors than previous years."
Mayes thinks that a number of reasons drive this recent trend. First, many clients are becoming wary of signing a kitchen-sink deal that hands over their entire IT department to a single supplier. Clients not receiving the expected cost savings or service have raised caution in finalizing those billion-dollar blockbusters. Also, corporate executives are increasingly willing to work with a larger number of service partners.
"In the past, where a company might have outsourced their entire IT department to a single vendor, now they're only outsourcing their desktop management to one company, their network management to another, and their applications part of the business to an offshore company in India," Mayes says. "Clients have become a lot more confident about handling a multitude of vendors, instead of just one."
The 10 vendors with the largest single-market shares of the contracts tracked in 2004 by value accounted for 57 percent of the total. This compares to 68 percent in 2003, and 70 percent in 2002. The report also found a 39.8 percent decrease in the average contract value for pure business process outsourcing deals. This drop in average value was being driven by a 51 percent increase in the total number of these deals in the $20 million to $200 million range--there were almost six times as many deals that range, compared to deals in the $200 million-plus range.
"We are seeing increasing competition from a variety of firms like Hewitt and Perot that are beginning to win deals that were traditionally won by those in the top-ten vendors," says Michel Janssen, president of supplier solutions at Everest Group. "Looking farther down the road we are also seeing the top-tier offshore vendors, such as TCS, Infosys, and Wipro, compete--and win--in head-to-head deals against top-tier Western vendors. And the wins are increasingly larger in size."
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