New research by independent market analysts Datamonitor (DTM.L), has found that businesses globally dramatically increased their investment in major IT and business process outsourcing (BPO) initiatives in 2003. Despite a backlash against outsourcers following several high profile contract failures, Datamonitor's IT Services Contract Tracker*, reveals the number of deals with a value greater than $100m increased 49 percent to 244. Those deals worth in excess of $1 billion more than doubled to 29.
According to Datamonitor this increase has largely been driven by new contract awards by public sector organizations such as the U.K. National Health Service and the U.S Department of Defense, which have brought in private sector specialists to upgrade their existing technology infrastructure. IBM Global Services took the largest share of major contracts in 2003 with 21 percent, while Computer Sciences Co and Hewlett-Packard made significant gains.
Outsourcing attracted a lot of negative publicity in 2003, as clients including the U.K. Inland Revenue and the U.S. Internal Revenue Service ran into problems with their incumbent suppliers. However, this has not deterred organizations from committing to bigger and longer deals. The U.K. Inland Revenue is a prime example. After ending a heavily criticized deal with EDS, the government department signed a new $5.1 billion deal with Cap Gemini Ernst & Young in December 2003, in what ranked as the year's largest single contract.
Datamonitor tracked $119 billion of major IT services contracts in total during 2003, which represented a 44 percent increase over 2002. The biggest spending sector was the central government sector where Datamonitor tracked $18.5 billion of contracts, which was more than double the level in the previous year. The defense sector was the second biggest investor, with $18.2 billion in deals during 2003.
One clear trend is the massive increase in the use of the offshore delivery model, where clients source application development and management skills from low-cost countries such as India and China. Datamonitor tracked $1.66 billion of contracts with an offshore delivery element in 2003, which represented a huge 890 percent increase over 2002. Companies such as HSBC and BT Group have come under recent fire for their plans to replace some IT and back office processing positions in the U.K. with offshore labor. However, Datamonitor found that only a very small amount of deals in 2003 involved offshore delivery just 1.4 percent.
Nick Mayes, Managing Analyst for Global Computing Services at Datamonitor, comments, "There was a big surge in the number of megadeals last year. But the majority of them will not be as profitable for the services providers as those long-term contracts that they signed in the 1990s, as it has become a buyer's market. Clients have been able to squeeze some big cost reductions out of their incumbent suppliers, which are also being held to increasingly tight performance targets."
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