Outsourcing, Deals, Market, Sector

Mid-size deals and Government sector drive outsourcing market

20 Jan 2005 | (Survey)

New research by independent market analyst Datamonitor and leading outsourcing advisory firm Everest Group shows that the global outsourcing sector is increasingly being driven by mid-size contracts, particularly in the fast-growing Business Process Outsourcing market segment. In addition, contracts awarded during 2004 were distributed among a larger number of vendors than in previous years.

Datamonitor's "IT Services Contract Tracker" tracked 1,814 outsourcing deals in 2004, a 4.4% increase over the 1,738 logged in 2003. The combined value of the 2004 deals rose more sharply by 37% to $163bn compared to $118.9bn the previous year.

According to Datamonitor, the value of outsourcing deals in 2004 grew 37%, reflecting a steady recovery in the IT services market. IBM Global Services captured the largest market share (10.7%), with deals signed in the central government sector growing 78% during 2004.

There were fewer mega billion-dollar deals in 2004 than in 2003 (25 versus 29). This seems to tally with the belief of many in the services sector that clients are adopting selective sourcing models, where they outsource specific IT and back office functions to specialist outsourcing vendors rather than hand over their entire IT department to a single supplier.

Nick Mayes, lead analyst for Global Computing Services at Datamonitor, noted: "One striking feature of the services market in 2004 was that the deals were distributed among a larger number of vendors than in previous years." The ten vendors with the largest single market shares of the contracts tracked in 2004 by value accounted for 57% of the total. This compares to 68% in 2003 and 70% in 2002.

Michel Janssen, President, Supplier Solutions, Everest Group, commented: "We are seeing increasing competition from a variety of firms like ACS, Hewitt, and Perot that are beginning to win deals that were traditionally won by those in the top ten vendors. Looking further down the road, we are also seeing the top tier offshore vendors such as TCS, Infosys, and Wipro compete, and win, in head-to-head deals against top tier Western vendors - and the wins are increasingly larger in size."

The Datamonitor report also found a 39.8% decrease in the average contract value for pure BPO deals. This drop in average value was being driven by a 51% increase in the total number of these deals in the $20m-$200m range. There were almost six times as many deals in the $20m-$200m range compared the $200m+ range.

Janssen also noted that for the first time, mid-to-large versus the large- to very large businesses dominated human resources outsourcing. "2005 will be the year that BPO goes mainstream, and it will be driven by mid-size client organizations." Janssen says companies with between 5,000-25,000 workers did more of these broad scoped HRO deals. In the past, companies with more than 25,000 employees were the ones inking HR outsourcing deals.

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