The value of outsourcing deals grew 37 percent last year, reflecting a steady recovery in the market. IBM Global Services captured the largest market share (10.7 percent.) And, for the first time, mid-to-large-sized companies are playing an important role in the BPO market.
Those are just a few of the insights from ComputerWire's just released annual analysis of the data in its IT Services Contract Tracker, a database with 6,500 global contracts. The division of Datamonitor began tracking ITO and BPO services contracts in 2001. ComputerWire includes all outsourcing, systems integration, and consulting contracts over $1 million in this database.
Michel Janssen, President, Supplier Solutions, Everest Group, notes "offshore outsourcing is a huge driver behind outsourcing growth." Last year offshore got a boost from Lou Dobbs, who helped make offshore outsourcing a household issue in the US. "He did a great job of publicizing the fact that many global companies are sending work offshore and recognizing significant savings," says Janssen. "His reports really asked companies who were sitting on the sidelines, 'What are you waiting for?'"
2004 also saw the emergence of new key players in the global supplier market: the Indian troika of Infosys, Tata Consultancy Services, and Wipro Technologies. "They are starting to compete head-to-head with the other established global suppliers," Janssen says.
The BPO Story
For the first time, smaller businesses dominated human resources outsourcing, "the hottest BPO area," points out Janssen. The ComputerWire report found a 39.8 percent decrease in the average contract value for pure BPO deals. But there was a 51 percent increase in the total number of these deals in the $20-$200 million range.
"For the first time, mid-to-large versus the large-to-very large businesses dominated human resources outsourcing," points out Janssen. He says companies with 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.
The analysis underscored what Nick Mayes, Principal Analyst for Global Computing Services at Datamonitor, calls "one of the biggest trends in the IT services sector: the growing overlap of computing and back-office administrative services/BPO." While the deals are still small compared to the largest IT outsourcing transactions, the numbers are doubling. Only 16 of the 100 largest contracts ComputerWire studied last year had a significant amount of BPO services. But that number doubled the eight deals of 2003. Put another way, the report found a 16.5 percent increase in total value of deals with only an IT outsourcing (ITO) component and a 77.6 percent increase in IT deals with a BPO component.
Good News: Growth
"Outsourcing services achieved stability in 2004," reports Mayes, who conceived the Tracker. Last year the total value of recorded deals was $163 billion, up 37 percent from 2003's $118.9 billion, according to the analysis report. However, the number of deals-1,814-were up just 4.4 percent from 2003.
Government and defense agencies spurred much of this growth. The 20 largest contracts in this sector were worth $45 billion, up 61 percent over the $27.9 billion figure for 2003.
From Single Source to Selective Sourcing Deals
Mayes says buyers are moving away from the single source deals of the past to selective sourcing. "There were fewer $1 billion deals last year. Buyers are wary of those deals," he adds. Instead, buyers prefer to deal with best-of-breed service providers. "This year we will see more partnerships," he predicts.
The numbers tell the story. In 2002 the ten suppliers with the largest market share accounted for 70.4 percent of the total. In 2003 that percentage slipped to 68.1 percent. Last year the top 10 players only accounted for 57 percent of the total contract value.
IBM led the pack with $17.4 billion in contract value in three $1 billion transactions and 37 $100 million deals, achieving a 10.7 percent market share. CSC at 9.5 percent and Lockheed Martin at 9.4 percent rounded out the top three. But Mayes says "the key take away is it's still a very open marketplace even if IBM is getting bigger. No one has a monopoly position."
Opportunities for the Second-Tier Suppliers
Mayes says the increasingly competitive IT market means "there are opportunities for the second-tier suppliers to win business" even when they compete against the first tier providers. He believes specialty suppliers will be able to win more business when they join a consortium to bid for the work. That's why he predicts this year "there will be more growth" in the second-tier BPO contracts, which range from $100 million to $1 billion, than in the very big deals.
He sees providers developing models that they can sell to the smaller buyers. This year suppliers will use "more one-to-many models."
Good New for Buyers
The increasingly fragmented marketplace is good news for buyers of IT services. He feels prices will remain competitive "because there are so many suppliers bidding for the work."
How the study was done: ComputerWire has tracked IT service provider signings since 2001. The analyst company adds to its IT Services Contract Tracker database daily. Analysts monitor all service provider public announcements. They also include all "off diary" transactions that analysts learn about from their regular interaction with service providers. In addition, analysts monitor all major business wire services for news. ComputerWire issues quarterly and annual analysis reports gauging the health of the ITO sector.
The attached report is based on the data in the database on January 4, 2004.