After a slump that accompanied the recent economic storm, outsourcing activity is on the rise. But individual deals are one-tenth the size they were before, and may keep getting smaller as companies opt for more focused deals that emphasize results, along with the rise of cloud computing.
Those are some of the findings of Morrison & Foerster’s latest survey of global sourcing across North America, Asia and Europe. The law firm gathered observations from its partners involved in managing outsourcing contracts in these regions. Overall, Morrison & Foerster reports, “we have certainly seen an increased flow of outsourcing deals, with more emphasis on new deals and less on renegotiating existing deals to cut costs. Indeed, the number of outsourcing arrangements that we’ve worked on has grown throughout the year, and the past 12 months have been the most active of the previous four years. The study references the work of ISG, which reports 41% year-to-year growth in the global outsourcing market.
Morrison & Foerster reports a decline in the overall value of individual deals, with fewer megadeals in which entire operations and staff is turned over to a third party:
“Companies are often engaging in smaller deals, focused on specific, carefully defined areas. Thus, where a large deal a few years ago might have been worth $1 billion or more, today’s larger transactions tend to be valued at $100 million and above. …in general, companies are showing a heightened aversion to risk and are not outsourcing anything more than seems necessary.”
Companies are also relying on several smaller providers to handle work, rather than one large provider responsible for a multifaceted engagement. “Single ‘tower’ projects are more prevalent,” Morrison & Foerster report. “We continue to see greater use of multisourcing, with different towers of services handled separately by different providers… At the same time, providers are enabling this trend with a growing array of ‘as a service’ offerings, designed t provide a menu of service offerings from which customers can choose.”
This move toward multisourcing among competing providers is creating more of an open marketplace, an increasing commodization of various services being delivered. “This multisourcing approach lets companies take advantage of the cost-effectiveness related to the commoditization of some services, such as certain help-desk activities and PC break-fix, thus reducing the costs of the outsourced services.”
Cloud computing is also increasing as a topic frequently discussed in outsourcing deals, the report states. “Many companies have established plans fo the cloud, and many have a clear grasp of the benefits that cloud-based delivery of services can provide, such as reduced costs and the flexibility to scale capacity up and down, quickly and easily.” A majority of deals taking place, 56%, are shared services arrangements, which relies on cloud.
Morrison & Foerster is on to something. We may have only begin to see the disruptive effect cloud is having on the outsourcing market. In a sense, just about every company that taps into a public cloud service is outsourcing. It remains to be seen how quickly cloud services are adopted to handle critical core business functions.
(Cross-posted at SmartPlanet Business Brains.)
(Illustration: Jquemba via Wikimedia.)