What IT Outsourcing Boom? Renegotiations Dominate IT Services Activity

Renegotiated and restructured deals–not new contracts–dominated the IT services industry in the first quarter of 2010. The remainder of the year will bring more of the same, says outsourcing consultancy TPI.

At first glance, the numbers seem to indicate a robust rebound for the IT outsourcing industry. Total contract values for application development and applications-plus-infrastructure deals signed in the first quarter of 2010 more than doubled compared to the same period last year. Application development deals totaled $3.2 billion while applications-plus-infrastructure deals were worth $7.6 billion, according to IT services consultancy TPI. All told, IT outsourcing customers inked contracts worth a total of $16 billion over the three-month period—a 46 percent year-over-year increase, TPI reports.

But a closer look at the wheeling and dealing reveals that it was contract renegotiations—particularly mega-deal restructuring—behind those big gains. Three of the four mega-deals signed were actually reshuffled contracts, ranging in value from $1.2 billion to $2 billion and accounting for a third of this quarter’s total IT outsourcing contract value.

Thus, the IT outsourcing industry’s recovery began, not with a bang, but with a whimper.

IT outsourcing contract renewals tend to be cyclical and predictable—coming as the end of the deal’s term approaches, notes Mark Mayo, president of TPI Global Operations. But that’s not the case this year.

“Several of the larger examples took place well in advance of the scheduled contract end dates,” Mayo says.

A number of factors drove these mid-contract reorganizations. Tough economic times created a need for some clients to seek more contractual and pricing flexibility from their vendors. Others went through mergers and acquisitions. Still others found that changing business requirements necessitated revisiting their IT services deals to meet current demands.

While most clients chose to leave the bulk of their IT services with their incumbent outsourcing provider, they’re increasingly breaking up portions of the work and awarding it to other vendors.

“This is especially true in the larger multi-tower ITO restructurings,” says Mayo.

Offshore providers may benefit from the shift to a multi-sourcing strategy. “The Indian heritage companies are focusing on these split off scopes as a market opportunity,” Mayo says.

The number of contracts set to expire over the course of 2010 will put a considerable amount of work up for grabs in the coming months–nearly $12 billion in annual contract value, up 25 percent from 2009, according to TPI. And more mega-deals are due to expire this year than last year. So renewals, renegotiations and extensions—not new deals—will continue to be the focus of IT outsourcing for the rest of 2010, says Mayo, as the industry makes a “gradual, but uneven recovery.”

Source: CIO

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