Firms hold back on outsourcing megadeals

Businesses are signing fewer outsourcing megadeals as the credit crunch dents confidence, a key report has revealed.

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Businesses are signing fewer outsourcing "mega-deals" as the credit crunch dents confidence, a key report has revealed.

Only three deals worth over €800 million (£751 million) were signed globally in the second half of 2008, compared with 12 in the first half of the year, according to the TPI index. They totalled €5.2 billion, compared to €13.6 billion for the 12 deals in the first six months.

In Europe, just one mega-deal was signed in the second half, compared to five in the first six months. Nevertheless, average contract value on the continent for the full year hit €14 billion, a record figure.

Duncan Aitchison, EMEA president at TPI, said: “While market indicators don’t point to a near-term return in demand for large complex outsourcing arrangements, we believe that there will be a steady flow of smaller, more tactical outsourcing contracts signed globally. Companies are searching for ways to reduce their operating expenses quickly and outsourcing can be a valuable tool with which to effectively weather the economic storms of 2009.”

Aitchison warned that it was hard to predict how long the glut in megadeals would last, but said if there were further growth in outsourcing contract size it would indicate “renewed confidence in the stability and growth of economic markets”. But contracts were still short, focusing on “near term concerns”, he said.

Anthony Miller, analyst at TechMarketView, wrote in a blog: “It seems pretty clear that large enterprises have all but lost their appetite for major outsourcing deals, instead breaking them down into smaller pieces with, we assume, quicker ROI. It doesn’t take a rocket scientist to realise, then, that the ‘big boys’ in the sector, like IBM, Accenture, HP/EDS, CSC, et al are going to have graze further afield for the next meal, and this will not be good news for the tier two players.”

This morning, BT reported that it is taking a £340 million hit after a review of its BT Global Services group. It warned that negotiations are currently taking place on some of its major contracts.

Indian outsourcers won substantial new business in Europe in 2008, with TCS, Infosys and Wipro each signing over five European outsourcing deals during the year, Miller noted.

But the accounting scandal at Satyam, and the Mumbai terrorist attacks, could both damage confidence in outsourcing to India, Aitchison at TPI said. The "damage to client confidence from the Satyam situation is not trivial, but hopefully will be limited to that one firm", he said.

Clients of Indian outsourcers would likely "try to realign the service agreements among their providers in ways that mitigate perceived risks”, he said.