Large companies are changing the way they outsource.
An examination of the biggest deals shows more companies lately are inking business process outsourcing deals, in which they turn over responsibility for a functional area such as human resources or logistics to a vendor. The rise in BPO deals is offset by a decline in traditional IT-centric outsourcing services.
There are also more players competing for the biggest outsourcing deals, says David Tapper, director of IT outsourcing, utility and offshore services research at IDC. Tapper co-authored IDC's study of the 100 largest outsourcing deals inked in 2004, a 211-page report published late last month that digs inside key trends such as contract value, service type, vendor share and industry activity.
Put together, the total value of the 100 largest outsourcing deals fell slightly from US$69.1 billion in 2003 to US$68.3 billion in 2004. The minimum qualifying deal value rose 5 percent to US$184 million.
BPO deals accounted for 25 percent of the total deal value, up from 15.2 percent in 2003. IT outsourcing deals lost share, falling to 75 percent of total deal value from 84.8 percent in 2003.
Companies are under pressure to lower their costs and increase productivity, which is driving some of the changes in the outsourcing industry, Tapper says.
IDC identifies three key business drivers for BPO adoption:
-- Cost management. Companies want greater visibility over costs, a better understanding of cost drivers, and more effective management of operational costs associated with outsourced business processes, IDC says.
-- Focus on core competencies. Companies are more strict than ever about focusing resources on activities related to their core mission and competitive strength and reducing involvement in operational technicalities.
-- Risk management. Savvy companies are reducing their financial, technical and organizational risks by leveraging service providers' process expertise and dedicated capabilities.
Another key trend IDC identified is "multisourcing," a tactic that calls for divvying up work among multiple outsourcers. Multi-sourced deals accounted for US$15.9 billion -- or 23.3 percent -- of the total value of the 100 largest outsourcing deals.
Among the enterprises that participated in more than one of the top 100 outsourcing deals is the U.K. Department of Health, which inked a US$465 million BPO deal, a US$1.6 billion IS outsourcing deal, and US$1 billion network and desktop outsourcing deal. Other multisourcing enterprises on the list are Deutsche Bank, which split US$2.575 between two vendors, and Bank of America, which divided US$2.37 billion among three vendors.
Looking ahead, Tapper expects more companies will pursue a multi-vendor outsourcing approach -- for the short term at least. One of the most anticipated multisourcing deals could come from GM, which has a multibillion dollar outsourcing contract with EDS set to expire in 2006.
But Tapper doesn't see multi-sourced tactics persisting indefinitely. "I think it's going to continue for a while. I'm not a believer in it as a long-term model," he says.
For companies looking to execute broad transformations -- encompassing networks, applications and business processes, for example -- the model makes sense. "Under those conditions I can understand why you have separate players focusing on separate areas," Tapper says. "There is a sense that you can accomplish more by breaking it down into parts, and there's truth to that." To expect one outsourcing provider to have the expertise and resources to transform all of these areas is unreasonable.
But from a financial point of view, multisourcing raises a lot of questions. There are administrative costs associated with each vendor, Tapper says.
Additionally, the piecemeal approach to outsourcing isn't immediately compatible with the overall trend toward system and process integration, he says. "From a long-term perspective, the problem is that we are moving to more integrated model. Our applications are getting integrated to each other, they run over a network which is integrated, our client devices are integrate -- so who is going to be responsible for the service level?"
What may become prevalent is to incorporate deals that involve new service delivery models, such as utility computing and software-as-a-service, Tapper says. This approach lets companies test new service models without committing to full-scale outsourcing arrangements or requiring a major disruption to operations.
A number of companies already have inked multi-vendor outsourcing deals that involve new, innovative delivery models, Tapper says. For example, DuPont has traditional IT outsourcing deals with Accenture and CSC, a BPO contract with Convergys, and uses Salesforce.com's hosted CRM software.
The trend to multisourcing parallels a decline in the number of so-called megadeals -- contracts valued at US$1 billion or more. There were 24 megadeals in 2003 compared to 19 in 2004. Meanwhile, deals valued between US$500 million and US$999 million grew, accounting for 29.7 percent of top-100 monies contracted compared to 15 percent in 2003.
CSC inked the most US$1 billion-plus deals, landing four out of the 19 megadeals signed in 2004. In terms of dollars, Capgemini's two megadeals with TXU and Schneider Electric combined were worth US$5.55 billion, more than CSC's US$5.35 billion worth of megadeals.
The number of vendors that won top-100 contracts increased from 26 in 2003 to 34 in 2004. IBM had the most wins with 21 of the 100 biggest contracts, followed by CSC with eight, EDS with seven, Atos Origin and HP with six apiece, and Accenture with five.
Tapper expects a similarly large group of vendors to be involved in next year's top 100 outsourcing deals, with some new players showing up. Tyco Electronics, for one. Its M/A-COM business unit signed a US$2 billion contract with the state of New York to build and run a statewide public safety wireless network -- a deal that will likely make the 2005 list of the largest deals, Tapper says. "We've never seen companies like that in this game."