Outsourcing deals to face greater EC scrutiny

Updated competition guidelines mean more outsourcing deals may have to go to the European Commission for approval

New competition guidelines are set to put outsourcing deals under greater scrutiny from European Commission regulators.

The Commission's latest updated guidelines, and interpretation of the 1990 Merger Regulation, now include a section on how an increasing number of joint-venture outsourcing deals can fall under the terms of the legislation.

This means that where an outsourcing supplier is buying all or part of the IT assets being outsourced by a company — such as a joint venture arrangement — the deal may need to go to the European Commission for approval.

The threshold test for deals that will need Commission approval is if the supplier has a turnover of €5bn (£3.4bn) globally and €250m in Europe, and if the potential turnover of the outsourced IT operation also exceeds €250m per year.

Deals that have already come under European Commission scrutiny include IBM's Italia deal in 2001 and Lufthansa's IT joint-venture with EDS in 1995. Most deals will be approved within five weeks but a small number that need greater scrutiny could take up to four months to get the go-ahead from the Commission.

Phil McDonnell, head of competition at law firm Addleshaw Goddard, said companies will have to factor this extra time and the possible delay into their outsourcing plans from the start. "You have got to build in some time into your procurement to give the supplier time to go through the hoops. You could also use it to identify suppliers who will give you least aggravation — it might give the smaller suppliers potential differentiation."

Suppliers will also need to factor these likely delays into their planning but McDonnell also warned that the Commission may eventually start to restrict the number of outsourcing deals any one supplier can hold with companies in a particular sector because of competition regulations.

He said: "There will come a point where a regulator will say a supplier has too many deals in the same sector. I don't think we are at that point yet but that is where it is heading."