EDS signed $3.8 billion in new deals in the fourth quarter, which was down 5% on the $4 billion signed in the fourth quarter of 2003, and well short of the $5.5 billion it had hoped to clinch during the quarter. Chairman and CEO Michael Jordan admitted: While we improved our full-year signings and win-rates, our fourth quarter signings fell short of our target.

IBM Global Services, the sector’s largest player, announced contracts totaling $12.7 billion in the fourth quarter, down 27% on the $17.3 billion it bagged during the year-ago period. It ended 2004 with an estimated services backlog of $111 billion, down from $120 billion at the end of 2003.

Accenture, another tier one outsourcing vendor, announced new contract bookings of bookings of $4.03 billion in its first fiscal quarter ending November 30, 2004, compared to $5.05 billion in the year-ago quarter. Within these totals, outsourcing bookings fell to $2.07 billion from $2.98 billion in the first quarter of 2003. Computer Sciences, the fourth-ranked outsourcing firm worldwide reported a 12% fall in new contract signings to $5.3 billion in its third fiscal quarter ending January 2, 2004.

For the last five years, large, multi-$100 million infrastructure outsourcing deals have been the major growth driver for the services sector’s largest players, as clients looked to strip out the day-to-day cost of running their non-core infrastructure.

Although cost reduction remains a priority for many enterprises, they are increasingly using consortia of best-of-breed suppliers to source IT management and support skills. Clients are increasingly likely to choose three different vendors to handle their applications, their hardware infrastructure, and their networks. This is due to CIOs’ increased experience of managing outsourcing deals, a highly competitive supplier market, and client skepticism over the benefit of large, single-supplier deals.

This trend is playing into the hands of second-tier outsourcers with more of a vertical or horizontal focus. Perot Systems’ new contract signings increased to $507 million in the fourth quarter from $216 million in the year-ago period. In its second fiscal quarter ending December 31, 2004, Dallas-based outsourcer ACS grew recurring new business signings to $227 million from $141 million in the year-ago period.

As ComputerWire highlighted in its Global Computing Services title last December, the longer-term concern for the outsourcing vendors such as EDS is that they are signing less in terms of deals than they are recognizing in revenue. If you are booking less than you’re billing, your underlying growth will be negative no matter what revenue growth you boast.

EDS’ revenue in the fourth quarter was $5.25 billion compared to its bookings of $3.8bn. IBM GS’ revenue at $12.7 billion was only slightly higher than its bookings of $12.6 billion. Applications management specialist Keane, which sources an increasing amount of its work from low-cost centers in India, increased its bookings by 27% to $1.1 billion in full-year 2004.

One effect of this slowdown in new contract signings is that major IT services are increasingly using M&A activity as a way of boosting revenue growth and of moving into higher-growth areas such as business process outsourcing.

IBM Global Services has been uncharacteristically prolific in its M&A activity in the last 12 months, moving into insurance transaction processing with the purchase of Liberty Insurance Services, procurement outsourcing with KeyMRO, and last week, finance and accounting outsourcing with the purchase of Equitant.

Despite its relatively fragile financial position, EDS announced last month that it was to pay $420 million in cash to acquire the human resources outsourcing operation of Towers Perrin.

With respective annual revenues of $46 billion and $21 billion, IBM GS and EDS rank as the two top dogs in the $600 billion IT services sector. But unless they can regain their momentum through these strategic sorties into BPO – and they cannot rely on M&A activity alone to drive profitable growth – they will find the gap closing between them and their more nimble rivals.