In-Depth

Outsourcers Turn to Multisourcing to Reduce Risk

Outsourcing megadeals appear to be on the decline; does this mean that outsourcing itself is on the way out?

• By Stephen Swoyer
• 06/17/2008

Outsourcing "megadeals" appear to be on the wane: according to market watcher Gartner Inc., the number of reported megadeals -- contracts of $1 billion or more awarded to a single vendor -- actually declined last year. Does this mean that outsourcing itself is on the way out?

Probably not. It isn't that companies are less apt to outsource, Gartner stresses. In fact, outsourcing activity is still on the upswing.

However, instead of contracting with an individual vendor -- e.g., as Sprint once did with IBM Corp. (see http://esj.com/enterprise/article.aspx?EditorialsID=1614) -- organizations are pursuing "multisourcing" strategies -- i.e., contracting with multiple providers to help spread the risk.

"The decline in reported outsourcing contracts can be partially explained by the fact that outsourcing is now 'business as usual' for many enterprises," said Kurt Potter, research director at Gartner, in a statement. "There is more outsourcing activity, but fewer deals on average are reported, and this creates the false impression that outsourcing is decreasing."

Last year, Gartner counted 10 $1 billion-or-more outsourcing megadeals, a decline of 16.67 percent from 2006. The total value of those deals was $12 billion. That's the lowest aggregate total in eight years, according to Gartner, which says you'd have to go back to 2001 (when companies notched $20.3 billion in outsourcing deals) to find a close comparison.

In this respect, both total contract value (TCV) and average contract value (ACV) are decreasing, the analyst firm says.

"While further TCV erosion may be driven by the irreversible trends of global delivery and IT services industrialization as many leading-edge organizations move into their second and third generations of IT outsourcing, they may be looking at deal expansion to include wider application or business initiatives," Potter said. "Although these opportunities are likely to evolve from a single-provider to a multiple-provider engagement, in some cases, historical ties between provider and recipient may retain the potential for megadeals."

What does it all mean? In a sense, Potter and Gartner argue, the outsourcing industry is growing up. There's even a sense, they say, in which it's becoming commoditized. "Many providers are pursuing smaller contract strategies as a consequence of the new market realities, new competition, and natural market pressures toward commoditization, which reduces per-unit pricing. These strategies are often in the form of pursuit of smaller contracts from larger clients, or larger contracts from smaller companies," Potter commented.

Companies are also wary of jumping into huge deals with unproven providers. As a result, companies frequently start small and increase their outsourcing activities with proven providers over time. "Many clients want to test providers' contracting practices, capabilities and cultures before moving favored providers into larger contracts, or organizations are using smaller doses of outsourcing to delay larger outsourcing adventures," he continued.

As the outsourcing industry has grown, competition has become more fierce. Providers are trying to nail down megadeals to meet their growth expectations. With megadeals on the wane, however, providers will try to tweak their offerings to appeal to smaller clients, Gartner predicts.

"Many providers are forced to pursue larger contracts to meet growth expectations. Despite this pressure, providers should continue to evaluate different or at least accommodate go-to-market and product portfolio strategies for smaller clients," Potter concluded.