As companies continue to move to using multiple providers for their outsourcing services, the number of reported megadeals awarded to a single service provider has declined, according to Gartner. Megadeals are characterised as being worth more than $US1 billion. In 2007, 10 outsourcing megadeals were awarded, a decline from 12 in 2006.
"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. "There is more outsourcing activity, but fewer deals on average are reported and this creates the false impression that outsourcing is decreasing".
In terms of megadeal total contact value (TCV), the total for the 10 megadeals in 2007 was $US12 billion, the lowest level reported during the last eight years, with the closest level being that of $US20.3 billion in 2001. Average contract value (ACV) of megadeals also continued to decrease, from an average of $US2.6 billion in 2006 to $US1.2 billion in 2007.
"While further TCV erosion may be driven by the irreversible trends of global delivery and IT services industrialisation as many leading-edge organisations 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".
Of the TCV of all outsourcing deals reported in 2007, Gartner said megadeals represented 39.4 per cent of the contract value and represented only 6.8 per cent of the number of total contracts in 2007, down from 7.4 per cent in 2006. Although deals with less than $US50 million in TCV continued to increase and reached 39.5 per cent of the total number of contracts, they only represented 3.3 per cent of TCV for 2007.
"Many providers are pursuing smaller contract strategies as a consequence of the new market realities, new competition, and natural market pressures toward commoditisation, 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 explained.
"Many clients want to test providers' contracting practices, capabilities, and cultures before moving favoured providers into larger contracts, or organisations are using smaller doses of outsourcing to delay larger outsourcing adventures. Many providers are forced to pursue larger contracts to meet growth expectations. Despite this pressure, providers should continue to evaluate different strategies or at least accommodate go-to-market and product portfolio strategies for smaller clients."
Len Rust is publisher of The Rust Report