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January 18, 2006

Outsourcing: watch this space

Leading outsourcing advisory firm TPI has discussed its analysis of the market's position at the start of 2006, covering outsourcing deals with a value of over E40 million. In such a dynamic sector there is always plenty of interest under the covers, but the fact that so many outsourcing deals are soon to be renegotiated is a particular pointer towards events to watch over the next year or two.

By CBR Staff Writer

Many existing outsourcing deals date from quite a number of years ago, when companies committed to tie-ins with a single supplier for multiple service lines far more readily than is currently felt to be advisable practice.

2005 was the first year when significant numbers of these deals were back on the table for bids – TPI reports that, in an average year, 15% of the total contract award revenue globally would arise from such deal renewals, but in 2005 this proportion was 24% (i.e. a 60% increase). Within the largest category of deals, of over E800 million in total value, a massive 40% of total contract revenue in 2005 arose from renewals.

How these longstanding (some doubters would say ‘long-suffering’) customers choose to act on their wealth of experience could validly be taken to say something about the prospects for the outsourcing industry, and if so, its chances do not look too grim at all. 90% of the outsourcing renewal deals involved the reappointment of the incumbent provider in some capacity – for example, BT, BP, chemicals multinational Rhodia, and energy company Talisman all maintained a relationship with Accenture.

Even after the rapid growth in the number of outsourcing deals in recent years, 2006 and 2007 will together see 20% of all current deals over E40 million up under renegotiation. This is such a significant proportion that TPI forecasts it will skew the appearance of the outsourcing market during that period, as the deals providers have to pursue will not represent new business growth, but maintenance of existing revenues. In any case, due to other factors, such as the competitive effect of Indian providers on pricing, the revenues in the overall market may decrease.

Despite what might seem to add up to fewer highlights, over the next two years we could see a fundamental change in the outsourcing market. At a time when end-user organizations with expiring deals could escape the bonds of those years-old outsourcing contracts, many decriers of outsourcing would forecast that a large number would revert to taking formerly outsourced activities back in-house.

However, it is likely that we will see much the opposite happen. Of course, chickens will deservedly come home to roost for outsourcing providers that have not delivered on the promises of higher quality and lower prices, and this may see a possible shift in power as big-ticket deals fall within reach of the leaner and hungrier providers that have been busily awaiting their chance to pitch at the world’s top board tables. This latter category of providers includes the leaders among what are still widely referred to as ‘the Indian companies’, although the term hardly befits the breadth of their services and geographical coverage today.

Even among those customers that have been victims of bad experiences as users of outsourcing, many will realize that a more mature outsourcing industry can provide benefits, if providers that are awarded deals can truly commit to a spirit of partnership within an outsourcing relationship, and to include terms in contracts to reflect customers’ real business needs, rather than just the right price.

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