"This is part of a trend we see in IT outsourcing (ITO) in which comprehensive, end-to-end contracts signed with a single vendor are declining. Even some existing megadeals are being re-competed and broken up among multiple providers that bring best-of-breed skills," said Kurt Potter, research director for Gartner's IT services and outsourcing research group. "Business process outsourcing (BPO) megadeals will continue to be the exception rather than the rule as most BPO activity will continue around smaller more-focused deals, primarily in the back-office and horizontal functions with human resources, finance and accounting."
Gartner says that although the contract value of individual outsourcing deals continues to decrease, there will be more of them and they will drive the outsourcing market to a growth rate of 7.3 percent from 2004 through 2009. The uptake in outsourcing as a business tool will continue and ITO will experience mature growth in 2006 at 5.1 percent, while the less-mature BPO market will grow faster at 8.7 percent in 2006.
Megadeals represent a significant share of total outsourcing contract value averaging $25.3 billion per year between 2003 and 2005. On average, megadeals represent 52 percent of publicly reported outsourcing contract value, and represent more contract value than all contract value categories combined. "Given that megadeals are set to decline in the near future, increasing numbers of outsourcing deals will occur in the $100 million to $999 million range. This is a consequence of a renewed service provider focus on the midsize market and will become the new battleground for the megadeal providers," said Mr. Potter.
Contract term lengths are also on the decline. The average of length of an ITO contract declined from 6.2 years to 5.3 years from 2003 through 2005. The average length of a BPO contract declined from 5.5 years to 4.8 years during the same period. When measured independently by year and type of outsourcing, the median length is consistently five years. The largest BPO deals are trending longer than the largest ITO deals because of lack of standardization and maturity in the market, which forces longer terms by service providers to recoup transition costs.
"The days of the 10-year outsourcing contract are numbered," said Mr. Potter. "End-user organizations have tough experience from their first-generation outsourcing deals and learned how quickly their outsourcing contract becomes outdated. Declining asset lifecycles, constant business changes, cost, innovation and cultural/business fit are affecting the contract length in the life of an outsourcing relationship. Organizations want shorter contracts with flexibility that won't lock them in."
Additional information is available in the Gartner report "Market Trends: Outsourcing Contracts, Worldwide, 2005." This report examines the outsourcing contract activity captured in the Gartner Outsourcing Contract Database from 2003 through 2005.
