Outsourcing deals shrink in value

The size and value of outsourcing deals has shrunk by about 20% so far this year, according to industry watchers, but the number of IT outsourcing contracts sustained a steady pace.

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The size and value of outsourcing deals has shrunk by about 20% so far this year, according to industry watchers, but the number of IT outsourcing contracts sustained a steady pace.

Global outsourcing advisory firm TPI Tuesday released data regarding outsourcing deals inked in the first quarter this year. According to the firm, some 141 deals totaling US$19 billion in total contract value (TCV) and $4 billion in annual contract value (ACV) were awarded to 48 service providers over the past three months.

Those TCV and ACV figures are down by 21% and 18% quarter-over-quarter and by 22% and 27% year-over-year, respectively. TPI noted the soft first quarter for outsourcers marks the lowest TCV numbers since 2001 and the lowest ACV since 2003.

"We anticipate the adoption of outsourcing will likely be software and more like the second half of 2008," said Peter Allen, TPI partner and managing director on a press conference call. "We expect this quarter's pace to continue as service providers are finding it takes longer to convert the pipeline of deals into contract awards."

The first quarter 2008 saw 82 contracts awarded, and this quarter's deals are more in line with the 108 outsourcing contracts signed in the fourth quarter of 2008.

"Peeling away the largest contracts reveal that there is a growing tendency to award more contracts at smaller values as companies deal with challenges around cost realignment," Allen said. "It is not uncommon for contracts that start out being smaller in value and in scope to evolve. This bodes well for the providers winning even smaller contracts."

Gartner's research shows similar outsourcing trends.The research firm says 2008 saw an increase in megadeals, but so far this year bigger deals are on the decline. Gartner says there is a trend toward a greater number of deals, but for smaller values. "In 2008, deals below $50 million saw a clear increase over 2006 and 2007, but deals over $50 million saw a collective decline," Gartner said in a statement.

Service providers such as HP, CSC and IBM have each reported winning more than five contracts during the first quarter this year, TPI reports, and other providers such as HCL have been closing several deals as well.

For instance, HP in April announced EDS Advanced Solutions (a subsidiary of EDS) had inked a $586 million, 12-year deal with British Columbia Ministry of Labour and Citizen's Services for hosting and datacentre services. HCL this year revealed three deals totaling $550 million: a six-year deal with Xerox, $350 million deal with Reader's Digest and a five-year engagement with Nokia.

And IBM added a 65-month agreement for outsourced IT services with Campbell's Soup to its Whirlpool win.

"We have seen some softness in large deal signings, but no catastrophic decline," said Allie Young, vice president and distinguished analyst for Gartner, in a statement. "While economic forces can change priorities, the basic drivers of outsourcing remain intact -- organisations still outsource for cost, efficiency, access to skills, focus on core business, innovation, modernisation and even business transformation."