Report: Users Shun Mega-Deals

The average size of IT services contracts nearly halved in the second quarter of 2005, as more and more companies move away from expensive mega-deals with outsourcers, according to analyst firm Datamonitor and outsourcing specialist Everest Group.

Users have clearly tightened their purse strings when it comes to outsourcing. The average size of contracts announced in the quarter was $56 million, compared to $106 million in the second quarter of 2004, says Datamonitor. Although the overall number of deals rose slightly, from 416 to 447, the total value fell significantly, from $44.1 billion to $25 billion.

Nick Mayes, principal analyst for IT services at Datamonitor, says companies that may have once outsourced large chunks of their IT departments in billion-dollar, long-term deals for general skillsets are instead looking for a number of smaller suppliers. Ideally, he adds, these will have specific skills based around desktops, servers, and applications.

Certainly, there has been plenty of speculation that the era of the IT mega-deal is over. Last year JP Morgan Chase & Co.

sent shockwaves around the IT industry when it ended a $5 billion outsourcing deal with IBM Corp. (NYSE: IBM). This followed the firms decision to merge with Bank One, which itself ended its own outsourcing deals with AT&T Corp. (NYSE: T)and IBM Global Services back in 2002, reportedly shaving $75 million off its technology budget in the process (see JP Morgan Ends IBM Outsourcing Deal and Outsourcing Is Not a Silver Bullet).

This seems to have affected the way that many users now perceive outsourcing. Mayes, for his part, is hardly surprised. “Most mega-deals haven’t delivered –- a lot of companies are finding that they aren’t flexible enough for them,” he says. “If a company merges with someone else, it’s very difficult for them to get out of their long-term deals without paying penalty charges.”Instead, users are now cherry-picking their outsourcing partners, according to Mayes. “They may outsource their desktop management to one company, their midrange servers to another, and their mainframe to someone else,” he says.

Mayes has also noticed a shift in geographic emphasis in the IT outsourcing market -- specifically, the role played by firms on the Indian subcontinent. It is no longer just low-level application maintenance work being sent over to India, he says.

Instead, many Indian firms are moving into areas such as helpdesk and server support, as well as developing the likes of complex wireless applications for the telecom industry. “A lot of Indian firms have gotten more sophisticated,” he explains. “They have got experienced consultants that really know their clients’ business now.”

Clearly, India’s role as a technology powerhouse is growing. Last year, in a poll of Light Reading readers, some 46 percent of respondents said their companies are sending more work over to the subcontinent (see Work Poll: Offshoring Gathers Steam).

Analyst firm Frost & Sullivan also reports that India is the single largest recipient of IT job imports, followed by China. However, the gap between the two countries is expected to narrow due to various IT-friendly initiatives undertaken by the Chinese government (see Global Outsourcing Gains Momentum).— James Rogers, Site Editor, Next-Gen Data Center Forum