Outsourcing: Is the megadeal really dead?

How UK organisations fell out of love with having just one throat to choke

Fashions in outsourcing change constantly - and the megadeals which were a hallmark of its early development have been replaced for many organisations by a more nuanced approach. But that doesn't mean the giant deals are gone forever.

Certainly as the recession began to bite, outsourcing megadeals - those of $1bn or more - started to decline. Research published in late 2008 - when the credit crunch first began to make itself truly felt - found there was one quarter where just a single megadeal was signed, while the value of outsourcing contracts across the board fell by two-thirds quarter-on-quarter.

And there's no doubt that some of that reluctance to sign megadeals was spurred by the economy, as traditionally outsourcing-friendly sectors such as financial services and manufacturing saw profits tumble and therefore IT spending did likewise.

"Typically you're looking at 12 to 15 [megadeals] a year around the world. We did see that drop down quite dramatically for a year or so, and a lot of that was driven by the cloud of uncertainty that descended across the globe," Duncan Aitchison, EMEA president of outsourcing consultancy TPI, told silicon.com.

Outsourcing megadeals are no longer the default for UK companies
(Image credit: Shutterstock)

"These kind of undertakings, by their definition, are big and they normally represent quite a strategic move for companies as they've got a significant amount of commitment attached to them. When you're in a period of quite dramatic uncertainty, organisations - quite logically - are less willingly looking at significant change programmes until they start to get some sense of what the future will look like," Aitchison added.

And it's not just the struggling sectors that have strived to push deal values down: even those who aren't suffering are expecting lower quotes from their suppliers - John Torrie, UK CEO of outsourcer Steria, told silicon.com: "There were customers who were doing very nicely and still got very aggressive about cost reduction... they realised their position and would come into meetings and say 'if you don't do something about this [price], we will reconsider'."

But while the ebb and flow of megadeals has tended to echo the ebb and flow of companies' financials, the maturing of the outsourcing market in countries such as the UK and US has a large part to play in seeing wallet-busting deals fall out of fashion.

The megadeals of yesteryear were typical of companies coming...

. . .to outsourcing for the first time, according to Lee Ayling, MD for IT and communications outsourcing at outsourcing deal advisors EquaTerra.

"IT technology outsourcing is mature in UK and US and maturing in western Europe - a lot of the initial megadeals were done when outsourcing was exotic, and it's not anymore," he said.

Back when the first wave of megadeals were signed, the market was dominated by the likes of EDS and Accenture, but now such heavyweights face competition from a new generation of big name Indian pureplays, as well as systems integrators that are moving into offering very specific outsourced services.

The move away from megadeals is also a sign of the growing confidence that buyers have in both negotiating and managing outsourcing arrangements. Having signed a first-generation megadeal and perhaps subsequently renewed it, CIOs at larger companies and multinationals are now more comfortable with moving to overseeing plural outsourcing arrangements, rather than just one.

The Indian campus of outsourcer Steria
(Photo credit: Jo Best/silicon.com)

"I think you move away from [megadeals] because you don't see the value [there] that you can get where you have a more segmented portfolio with a variety of service providers - and by value I mean financial value, bring additional capabilities to an organisation, access to skills and a variety of other things," EquaTerra's Ayling said.

Multisourcing is the new watchword - while companies are still maintaining their spending levels, they're spreading the cash among several providers rather than follow the traditional one-throat-to-choke route.

"You tend to see less megadeal activity partly because many large organisations have been through it all several times already so you have a different population, partly because they will have moved more towards a multisourced strategy and broken up the componentry of the transactions more significantly - even though if you add all the bits up together it's quite big, in individual size they tend to be a bit smaller," TPI's Aitchison said.

UK businesses still seem shy of megadeals...

. . .and Atos Origin UK CEO Keith Wilman said UK companies are cautious about committing to major spending so soon after the end of the recession.

"The current trend seems to be towards smaller deals in the private sector," he said.

"Private sector companies are coming back into the market but they are wanting work to be delivered a piece at a time, rather than through a full project."

The public sector meanwhile, once one of the chief proponents of the megadeal, is moving towards a more multisourced approach, with CIOs from across government calling for smaller contracts to become the procurement norm.

It's no surprise the government is trumpeting its move away from longer deals towards a model that features shorter contracts with a greater number of suppliers: after all, public sector megadeals have hardly left Whitehall covered in glory.

The £12.7bn National Programme for IT and the Rural Payments Agency's £1.5bn Single Payment Scheme are perhaps the classic examples of a project laden with megadeals gone wrong, rarely making headlines except for budget blowouts and countless delays.

Whitehall is losing its enthusiasm for megadeals
(Credit: Shutterstock)

Nowadays, the very top tier of government CIOs are calling for the megadeal to be ditched.

HM Revenue and Customs CIO Phil Pavitt recently said he believes the public sector must end its affair with the largest outsourcing deals - "It's time as an industry, and with my partners it is time as an outsourcer, that we began to reduce dramatically those programmes to sizes that can be understood, swallowed and delivered," he told a conference earlier this month.

It's a stance echoed too by the government CIO John Suffolk who, speaking at the Nasscom conference, talked of...

..."being smarter and breaking the lock-in" of long contracts - typically between five to seven years - that the government had previously got involved in.

"What the business requires changes in five to seven years, the business objectives of the supplier change in five to seven years," he said.

Equaterra's Ayling added: "The megadeals are getting smaller and less frequent and that's going to be the same in government as well."

So should we be sounding the death knell of the megadeal? Not so fast.

There remain examples of CIOs happy to discuss megadeals gone right - speaking at the Nasscom IT leaders conference in Mumbai last week, Filippo Passerini, CIO of Proctor & Gamble, talked up the success of the FMCG giant's $4bn outsourcing strategy which includes a multibillion-dollar arrangement with HP, originally struck in 2003.

"By giving our back office to our partner's front office, we have been able to free up within Proctor and Gamble a lot of mental energy. . .driving innovation," he told the conference.

Outsourcing has enabled the company to cut in half the time it takes to integrate new acquisitions - particularly useful in the case of the $57bn takeover of Gillette in 2005.

"We get $1.2bn of synergy savings every year - in real money that's $4m a day so time is of the essence. Doing it faster makes important value for our shareholders [and] our partners," he added.

Even among the happiest megadeals relationships, there's room for some changes however - in 2008, Proctor & Gamble signed a $650m network infrastructure deal with BT Global Services, which saw the services company take over a chunk of work previously delivered by HP.

Still, Passerini is unlikely to be the only CIO with his name on an uber-outsourcing deal in the coming years. According to TPI's Aitchison, the total number of megadeals globally is beginning to find its way back to pre-recession levels, with companies in territories fresh to outsourcing warming to the concept, even as their counterparts in mature markets lose their enthusiasm for it.

"Tracking the numbers, there does seem to have been a bit of a resurgence in that area - if you look at the profile and pattern of it all, you had a pretty heady run up to about the middle of 2008, then it fell away significantly for the next year, but in the back half of last year again we saw a click-up back towards what you might consider 'normal' levels of activity."