As companies attempt to implement more multisourcing agreements, the number of megadeals awarded to a single service provider has declined, according to Gartner, Inc. Megadeals are characterized as being worth more than $1 billion. In 2005, 11 outsourcing megadeals were awarded, a decline from 12 in 2004 and 16 in 2003.
"This is part of a trend we see in IT outsourcing (ITO) in which comprehensive, end-to-end contracts signed with a single vendor are declining. Even some existing megadeals are being re-competed and broken up among multiple providers that bring best-of-breed skills," said Kurt Potter, research director for Gartner's IT services and outsourcing research group. "Business process outsourcing (BPO) megadeals will continue to be the exception rather than the rule as most BPO activity will continue around smaller more-focused deals, primarily in the back-office and horizontal functions with human resources, finance and accounting."
Although the contract value of individual outsourcing deals continues to decrease, there will be more of them and they will drive the outsourcing market to a growth rate of 7.3 percent from 2004 through 2009. The uptake in outsourcing as a business tool will continue and ITO will experience mature growth in 2006 at 5.1 percent, while the less-mature BPO market will grow faster at 8.7 percent in 2006.
Gartner has maintained an Outsourcing Contract Trends Database since the early 1990s as a means of tracking the activity and trends in the outsourcing market for public and private organizations. All of these contracts publicly disclosed their dollar value and the duration, as well as the nature of their services and the name of the client and the outsourcer. The database is a comprehensive history of all publicly disclosed contracts, but is representative. Contracts from more than 400 outsourcing vendors, 12 industries and the major global regions are included.
"In regions with mature outsourcing practices such as North America and Western Europe, the decline in megadeals is caused by a move to selective outsourcing - signing smaller deals with multiple service providers - and more experience in outsourcing in the largest enterprises, where that experience can help them pick and choose the best vendors and services at the appropriate price therefore reducing possibilities for megadeals," Potter said.
Megadeals represent a significant share of total outsourcing contract value averaging $25.3 billion per year between 2003 and 2005. On average, megadeals represent 52 percent of publicly reported outsourcing contract value, and represent more contract value than all contract value categories combined. "Given that megadeals are set to decline in the near future, increasing numbers of outsourcing deals will occur in the $100 million to $999 million range. This is a consequence of a renewed service provider focus on the midsize market and will become the new battleground for the megadeal providers," said Mr. Potter.
Contract term lengths are also on the decline. The average of length of an ITO contract declined from 6.2 years to 5.3 years from 2003 through 2005. The average length of a BPO contract declined from 5.5 years to 4.8 years during the same period. When measured independently by year and type of outsourcing, the median length is consistently five years. The largest BPO deals are trending longer than the largest ITO deals because of lack of standardization and maturity in the market, which forces longer terms by service providers to recoup transition costs.
"The days of the 10-year outsourcing contract are numbered," said Potter. "End-user organizations have tough experience from their first-generation outsourcing deals and learned how quickly their outsourcing contract becomes outdated. Declining asset lifecycles, constant business changes, cost, innovation and cultural/business fit are affecting the contract length in the life of an outsourcing relationship. Organizations want shorter contracts with flexibility that won't lock them in."
Additional information is available in the Gartner report "Market Trends: Outsourcing Contracts, Worldwide, 2005." This report examines the outsourcing contract activity captured in the Gartner Outsourcing Contract Database from 2003 through 2005, but longer and shorter views are also provided. The report is available on Gartner's Web site at www.gartner.com/DisplayDocument?ref=g_search&id=490855 .
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