The services tide is turning

Specialist vendors finally have their window of opportunity, and the impending renewal of outsourcing contracts could shake up a service provider's market share.

commentary Despite industry talk about the demise of mega IT outsourcing contracts, there was still no concrete evidence until the third quarter this year.

In its latest quarterly report, TPI confirmed that megadeals are indeed falling out of favor. The outsourcing consulting firm had maintained in the second quarter that large contracts would continue to be a feature of the global outsourcing scene.

According to TPI's latest data, only eight megadeals--worth over 800 million euro (US$954 million)--have been inked to date, compared to 13 over the same period last year worldwide.

The report also revealed that worldwide, the average value of larger contracts signed to date is 183 million euro (US$218 million), down 24 percent from 240 million euro (US$286 million) a year ago. In Asia and Europe, the average contract value fell by 52 percent and 37 percent respectively, compared to the first three quarters in 2004.

The reasons for the sea-change: The impact of price competition; a typically lower capital component since contracts are less likely to involve the transfer of assets to the vendor; and a growing preference for specialist providers.

According to Duncan Aitchison, TPI International's managing director, some 128 contracts originally valued at over 32 billion euro (US$37.6 billion), will be up for renewal in 2006. Over 70 percent of this value is currently part of agreements with CSC, EDS and IBM.

"With such a significant volume of outsourcing contracts nearing their renewal date, 2006 could witness interesting shifts in the market share of the Big Six and other providers," Aitchison said. "Although contract lengths are declining, success or failure could have implications for a vendor's market position for years to come."

Another recent market report by Datamonitor and Everest Group also highlighted the growing success and presence of emerging players in this segment.

Indian suppliers Tata Consultancy Services (TCS) and Infosys Technologies, as well as second-tier international vendors Keane and Pomeroy Computer Resources "secured their largest-ever contract wins" during the third quarter of 2005, stated the report.

In July 2005, U.S.-based Pomeroy announced it had clinched its "largest services contract in the company's 25-year history". The three-year contract is estimated to be worth US$150 million.

Indian providers have also had much success in 2005. Most notably is the ABN Amro deal announced in September. TCS, Infosys and Patni Computer Systems, along with IBM and Accenture, won parts of the US$2.2 billion contract to provide the Dutch bank with IT services over five years.

"As the recent ABN Amro deal demonstrates, Indian providers are also now compete for and win the biggest application development and maintenance contracts," said Aitchison.

Boston, Mass.-based Keane also made headlines when it hired Wipro's chief executive of the Americas and enterprise application service business operations. Richard Garnick left Wipro in August to become Keane's president of North American Services, responsible for sales strategy and delivery execution for North America.

According to the consultants at the Everest Group, while IT giants like Accenture and IBM currently dominate the finance and accounting outsourcing space, "they are increasingly being challenged by the Indian offshore providers".

Michel Janssen, Everest's president of supplier solutions, noted that finance and accounting outsourcing are in sync with the strengths of Indian companies as this area of outsourcing does not revolve around technology issues. Instead, it is mainly a labor arbitrage play.

"India has a higher quality, educated workforce. They are not just offering clerks but college graduates who can not only do processing, but also superior analytic work," Janssen explained.

So with at least 128 contracts up for renewal in 2006, will the big boys be able to hold on and grow their market shares? Or will the smaller players be successful in breaking the stranglehold of the traditional IT service giants?

One thing is certain. After years of dominating the global outsourcing scene, the big boys are in for their biggest fight.

Isabelle Chan is senior editor of ZDNet Asia.