Selective outsourcing on the rise: report

The average outsourcing deal size is shrinking and enterprises are increasingly in favour of farming out IT and business processes to several best-of-breed service providers, according to a report by U.K.-based analyst house Datamonitor and Everest Corp., an outsourcing advisory firm in Dallas. But one Canadian researcher says this “multi-sourcing” approach is nothing new to Canuck businesses.

According to Datamonitor’s IT Services Contract Tracker, the average deal size in the US$600 billion global IT and business process outsourcing (BPO) services sector fell 18 per cent to US$68.9 million in the first quarter of 2005, compared to the same period a year ago. This means the average deal size has now declined for three consecutive quarters.

In the IT services realm alone, 456 contracts were announced during the first quarter of 2005 — up five per cent on the 435 recorded in Q1 ’04 — but the combined total value of the Q1 ’05 contracts was US$31.4 billion, a 13.7-per-cent decline on the first quarter of 2004 when the total value of contracts reached US$36.4 billion, said the report.

According to Nick Mayes, lead analyst for Global Computing Services at Datamonitor, the statistics suggest clients are now signing smaller, more focused deals with suppliers. Canadian enterprises not exempt from this trend; he said Datamonitor tracked US$339 million in Canadian IT services deals in Q1 ’05, with an average deal size of US$26 million. “This is down significantly on the US$767 million of deals and US$64-million average size we tracked in the first quarter of 2004,” he said.

Part of the reason for this trend is that many companies are currently in the middle of major outsourcing initiatives they signed in the late 1990s and early 2000s while under pressure to lower their IT operating costs. “There are fewer big deals up for tender,” Mayes said.

But the tendency to multi-source has also played its part, he said. Multi-sourcing, as defined by Datamonitor, takes on one of two forms: the client either outsources the work to a major service provider, which then farms the work out to several different suppliers focused on the various areas of infrastructure involved in the deal; or the customer seeks out and signs contracts with a number of different suppliers on its own.

“With the latter scenario, the customer is able to take more ownership of the relationship, but there may be high management costs internally,” Mayes said. “With the former, there is one throat to choke because the main service provider is responsible” if something goes wrong.

He cited two recent Canadian examples of outsourcing deals that have followed the multi-sourcing trend: Last year the National Bank of Canada signed major technology outsourcing deals with both Montreal-based IT services provider CGI Group Inc. and payment and information management services provider Intria in Mississauga, Ont. Toronto-based financial institution CIBC also outsourced its desktop support to HP and its HR support functions to EDS.

According to Mayes, enterprises may be moving toward the multi-sourcing model because they have already gone through first- or second-generation outsourcing deals, “so (they) feel more comfortable breaking down their outsourcing strategy to focus on a number of best-of-breed suppliers, rather than throw everything over the fence to a major vendor in a long-term outsource.”

Enterprises that may also be rethinking their outsourcing strategies because they may not have gained the expected cost benefits or performance improvements that they had hoped for from earlier deals, he added.

Jim Westcott, senior analyst with IDC Canada Ltd. in Toronto, referred to this trend as “selective outsourcing.” He gave an additional reason for enterprises choosing this approach: “They don’t want to invest all their resources with only one supplier. They are able to spread that risk around and go with suppliers that have a best-of-breed approach for specific processes and services.”

Westcott said selective outsourcing is really not that new in Canada — it has played its role in the maturation of the outsourcing market in this country from the get-go. “I would say that for the most part…because of the way the business community is structured in Canada,” where there are not as many large organizations are there are in the U.K. or the U.S., “(multi-sourcing) is really the way the outsourcing industry has grown up here,” he said. “There are relatively few examples of full-scope outsourcing deals…where IT, finance, HR, accounting (and) procurement are bound into one contract.”

One of these rare examples is the 10-year, US$1.45 billion agreement B.C. Hydro inked with Accenture in 2002. The agreement brought about the formation of Accenture Business Services of British Columbia, to which B.C. Hydro outsourced its customer, IT, network computing and HR services, as well as its financial systems, purchasing, and building and office services.

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