Rise of small outsourcing deals threatens Big Six, says TPI

According to TPI, 293 outsourcing contracts were signed in 2005, more than in any other year. Of these 70% were small to medium sized contracts (those worth $50 – $200 million), up from 65% in 2004 and 61% in 2003.

Whilst Indian providers rarely win deals over $200 million, below this threshold, in 2005 they were invited to pitch for 30% of contracts and went on to win 70% of these.

“Indian suppliers have been extremely successful in winning these deals and then growing the business through additional work orders,” said Duncan Aitchison, Managing Director of TPI. “However, with both the Big Six and the Indian providers rapidly expanding their global operations to meet the increasing demand for offshoring, the intense competition in this market looks set to continue.”

The Big Six of outsourcing include Accenture, ACS, CSC, EDS, HP, and IBM.

The trend to a larger number of smaller single function contracts and the increasing use of multiple providers is creating opportunities for a wider range of providers and driving increased competition, to the benefit of outsourcing purchasers and to the detriment of the Big Six, says TPI.

The firm found that 34 different providers signed Top 100 deals this year, up from 29 in 2004 and 20 in 2003. The Big Six won only 53% of the Top 100 deals in 2005, down from 57% in 2004 and 73% in 2003.

Similarly, the Big Six’s market share of major outsourcing contracts (those valued at over $50 million) fell to 43% in 2005, down from 49% in 2004 and over 70% back in 2003 and 2002. Twenty service providers signed four or more major contracts in 2005, up by a third from 15 in 2004 and part of a steady upward trend.

“TPI’s figures demonstrate the maturity of the market and the success of a growing number of service providers outside of the so-called Big Six,” said Aitchison. “An increasing number of providers are now able to compete for and win deals and this trend looks set to continue.”

The position of the Big Six is likely to be further hit as renewal dates for almost $100 billion worth of major outsourcing contracts draw near.

TPI’s analysis reveals that 325 deals are due for renewal during 2006 and 2007, representing over a fifth of active contracts. The service providers most heavily affected are IBM and EDS, with a combined share of $50 billion in contracts coming up for renewal. The Big Six are the incumbent service providers on 72% of the contract value to be renewed.

“Although historically, incumbent providers have tended to be retained almost as a matter of course, the increasing level and diversity of competition, coupled with a trend towards selective or single process outsourcing all mean that providers cannot rest on their laurels,” said Aitchison.

“Client retention will increasingly depend on an incumbent’s ability to offer a competitive proposition. This could mean significant changes in price and scope from the original contract,” he added.

An examination of the deals on which TPI advised in 2005 reveals that over 70% of contracts were competitive – an all time high and up by over a third, from 53% in 2004.

A higher percentage of offshore contracts were competitive (83%), and the share of the market held by the Big Six is falling. In 2005 they won only 37% of TPI-advised contracts involving offshoring, down from over half (52%) in 2004.

These figures are particularly worrying for the Big Six as the offshore market continues to grow, says TPI.

Very little information is available on the breakdown of outsourcing between onshore and offshore operations. However, an analysis of deals on which TPI has advised (which represent nearly a third of the outsourcing contracts let in 2005) reveals that over half (52%) involved ‘global service delivery’ or offshoring in 2005, a record high and up from 40% in 2004, says the firm.