Outsourcing: Smaller, Selective Deals This Year
Although outsourcing revenues increased by nearly 50 percent last year, experts predict slowing demand for outsourcing services in the first half of this year.
In the current economic climate, you'd expect an uptick in outsourcing activity. After all, when the going gets tough, bottom-line-focused CIOs turn to outsourcing.
Outsourcing activity is increasing, experts say -- even as the scope and nature of that activity changes. Companies are partnering more selectively -- perhaps more intelligently -- with outsourcing providers, emphasizing smaller deals over yesterday's mega-accords.
Companies are still making outsourcing megadeals (agreements worth more than $1 billion) according to market watcher Gartner Inc., but not at the pace of half-a-decade ago. For example, 12 companies concluded 12 outsourcing megadeals last year, up from 10 in 2007. That 20 percent increase is significant but still less (on a percentage basis) than the amounts recorded prior to 2007, Gartner says. On the other hand, year-over-year growth in outsourcing revenues significantly outpaced that 20 percent figure: 2008's 12 outsourcing megadeals amounted to $17.1 billion; that's almost 43 percent more than 2007's $12 billion tally.
Even allowing for last year's increase in outsourcing megadeals, the average tallies from what might called the "Golden Age" of outsourcing activity -- 2000 to 2006 -- still dwarf these totals: during that period, average annual total contract values were $28 billion.
The reason, the market watcher says, is that companies continue to opt for smaller, more selective outsourcing pairings with a number of separate providers. Call it risk management, outsourcing style: diversify your outsourcing portfolio to spread the risk and identify combinations that work.
"With the increasing popularity of selective sourcing and the trend toward greater control of the buyer, we continue to see both the average value of a deal and the average duration of a deal decline," said Dean Blackmore, senior research analyst for Gartner, in a statement.
Blackmore cites a definite trend toward "smaller is better," noting that last year deals amounting to $50 million or less increased even as deals worth $50 million or more declined. For the year, total contract value was up by 43 percent, an increase that Gartner attributes to "the much larger volume of total deals signed in 2008" -- which itself was a function of a worsening economic climate. To reiterate: when the going gets tough, the tough go outsourcing.
"In economic downturns, we closely watch contract reporting as an indicator of the health of the outsourcing market," said Allie Young, vice president and distinguished analyst for Gartner, in a prepared release. "We have seen some softness in large deal signings, but no catastrophic decline. While economic forces can change priorities, the basic drivers of outsourcing remain intact — organizations still outsource for cost, efficiency, access to skills, focus on core business, innovation, modernization and even business transformation."
Elsewhere, 2008 was the first year in which a sub-continental IT services provider (Tata Consultancy Services) was awarded the largest deal (at around $2.5 billion), Gartner says. At the same time, the locus of outsourcing activity -- the locales from which in-house activities are being outsourced -- seems to be shifting.
"Since 2006 there has been a steady decline in the number of ITO and BPO deals signed in the Americas and a gradual increase in the number signed in Europe, the Middle East, and Africa (EMEA) . In 2008, EMEA overtook the Americas as the leading geographic region in terms of volume of deals signed," the Gartner statement indicates. "In 2008, there were 162 signed in EMEA and 158 deals signed in the Americas. Deals signed that cover the global IT operations of buyers are also increasing and represented 25 percent of all deals signed in 2008."
Gartner says outsourcing activity will be comparatively slow through most of 2009. "While outsourcing held up in 2008, we expect to see a slowdown in contract signings during the first half of 2009 and possibly extending into the third quarter, largely due to the tightening of IT budgets in the fourth quarter of 2008, and only slow loosening of budgets in early 2009," Young predicted.
"Long sales cycles for outsourcing are the norm, depending on the complexity, scale, and scope of the outsourcing deals, which may lead to delayed signings. However, organizations with approval to outsource -- and desperate to save money -- may seek to move rapidly and shorten some steps of due diligence just to get the deal into place."