IT managers drive harder outsourcing bargains
Published: 11 Jan 2007 13:22 GMT
Outsourcing companies are facing increasing competition and falling contract values, giving IT managers greater bargaining power for outsourcing contracts in 2007.
According to outsourcing advisory company TPI, average outsourcing contract values fell to their lowest level in five years in the last quarter of 2006, with a year-on-year decrease of 8 percent in the value of new outsourcing deals.
TPI said on Thursday that a trend towards shorter and smaller contracts, and more specialist and single-process deals, meant that tendering activity remained high in 2006. Last year 350 outsourcing contracts were agreed, compared with 341 in 2005.
With the average contract length almost halving in the past 10 years, outsourcing competition has heightened as new players have won increasing market share.
"The market today is more competitive than it has ever been," said Duncan Aitchison, managing director of TPI Europe. "There's some good deals to be had."
"In practice, the trend towards shorter contract duration means that outsourcing providers are obliged to compete more often in order to secure the same level of business," Aitchison added. "Increased competition is clearly good for buyers."
However, greater diversity and specialisation among suppliers combined with more frequent tendering mean there will be more complexity in both the procurement process and the management of outsourcing contracts, said TPI.
IT managers are increasingly choosing companies based in India when outsourcing, particularly in the applications development and management (ADM) sector. According to TIP, India-based outsourcing companies in the ADM sector grew their market share from 8 percent in 2003 to 36 percent in 2006.
In contrast, the six largest outsourcing companies — Accenture, ACS, CSC, EDS, HP and IBM — have seen a decline from 76 percent of the ADM market in 2003 to just 38 percent in 2006.
"The figures clearly show a maturing of the India-based service providers, as they challenge the established players by taking an incremental approach and signing a large number of small, specialist contracts," said Aitchison.
"In the ADM space, for example, although they have not yet surpassed the big six, the difference between the market shares of these groups is now marginal. India-based providers are clearly considered an attractive and credible alternative to traditional players and over the next few years we expect to see them competing directly with the big six for larger-value contracts."
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