End of the era of mega outsourcing deals

Entering multisourcing territory

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Ten years ago in IT, Y2K had come and gone without catastrophe, security chiefs were grappling with the ILOVEYOU virus, and the dotcom bubble was bursting. But in the IT services industry, the year 2000 was notable for another reason, it was the year of the giant outsourcing deal.

A total of 24 IT outsourcing mega deals (multi-year contracts worth a billion dollars or more) were signed that year, more than the industry had seen before or since. All told, they were worth more than $54 billion, according to outsourcing consultancy TPI. They included the EDS-US Navy contract worth $6.9 billion, the Bank of Scotland's $1 billion deal with IBM Global Services, and the $3 billion IT services contract between Nortel Networks and CSC.

The year 2000 was indeed a "defining year for the outsourcing industry," says TPI's director and chief research officer Paul Reynolds, and one that led to record profits for outsourcing providers.

But times have changed. "The outsourcing market today is vastly different than when the majority of these mega deals were signed," says Reynolds. In 2010, outsourcing contracts tend to be shorter in duration and smaller in value. The average total contract value of an IT outsourcing deal in 2000 was $360 million. Today, it's nearly a third of that, according to TPI.

What will become of the supersized IT outsourcing contracts of 2000? All signs point to some mega breakups. Eleven of the 24 contracts signed in Y2K are set to expire this year, along with seven others signed in subsequent years.

"As large contracts approach their renewal dates, buyers in mature markets like the US and UK are increasingly likely to divide the contract scope among multiple service providers," says Reynolds. He predicts more of what TPI is now calling mega-relationships, deals with an annual contract value of $100 million or more, rather than mega deals.

"Outsourcing buyers are likely to continue signing shorter, more targeted contracts that are driven by cost-saving goals," says Reynolds.

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