| | UK businesses are facing
“outsourcing turmoil”,
with nearly £7bn worth
of outsourcing deals up
for renewal by March
2008, says a new report
from sourcing advisory
firm Morgan Chambers.
According to the
report, Outsourcing
Service Provider
Performance 2006, the
big outsourcing
providers will see their
high-value contracts
broken up and
distributed among a
number of providers in
the next two years, in
the biggest shake-up the
industry has seen since
the late 1990s.
The report, which is
undertaken annually,
surveyed 500 senior
(‘C’) level
representatives within
client companies across
Europe, in a number of
sectors, who outsource
all or part of their IT
or business processes.
It explores their
perceptions of
outsourcing providers,
their satisfaction with
performance and their
plans for future
contracts.
The report identifies
a clear trend away from
‘sole source’ deals in | |
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| | the UK – ie. giving the
whole outsourcing
contract to a single
provider – towards
‘multi-sourcing’, with
smaller, specialist
companies picking up
significant chunks of
business in shorter-term
contracts. The result
could have a serious
impact on the revenues
of the big outsourcing
providers, who are
likely to respond by
acquiring or
collaborating with
smaller specialists in
order to keep their
existing business.
On average, each UK
outsourcing contract is
worth in the region of
£28.5m, with the largest
contract up for renewal
being worth almost £900m
(a seven-year deal
between AstraZeneca and
IBM, which is due to be
renewed in February
2008). Most deals relate
to the provision of IT
rather than BPO which,
despite some
predictions, has grown
at a relatively slow
rate.
The service providers
that have, until now,
been seen as ‘offshore’
(for example, Wipro),
are beginning to | |
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| | overtake the traditional
‘end-to-end’ providers
on innovation and are
starting to be
considered a strategic
and not a purely
price-led buy (although
price is still an
important factor). This
has led many client
companies to reconsider
how they outsource, and
satisfaction levels are
shifting away from the
big US or
Pan-European-based
providers, who are
looking increasingly
vulnerable. Only 37% of
client companies in
large contractual
agreements worth more
than £25m are satisfied
with what they’re
getting, compared to 67%
satisfaction in smaller
(less than £3m)
contracts.
Loyalty is virtually
non-existent among
client companies, with
little differentiation
perceived between the
main providers. This
adds to the uncertainty
of contracts being
renewed. Of the
providers, Wipro and
Atos Origin were the
most likely to be
re-contracted, but even
in these cases, only 38% | |
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| | and 42% of clients
respectively said they
would definitely renew.
Phil Morris,
newly-appointed CEO of
Morgan Chambers, said:
“The outsourcing market
has matured and clients
are becoming smarter in
the way they contract.
Certain elements of
outsourcing such as
Infrastructure have
become a commodity buy.
The providers who will
secure greater market
share and more
investment from existing
clients are those who
can demonstrate
innovation or who can
develop a long-term
relationship that is
supportive of the
client’s business goals.
“Businesses are
beginning to drop the
‘offshore’ or
‘nearshore’ labels,
moving instead to
‘global sourcing’, with
no geographical
boundaries. This opens
up the market to a new
wave of providers and
contracting models.
“We will see a period
of consolidation in the
marketplace as providers
fight to keep their
existing business in any
way they can. Overall, | |
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| | the market continues to
grow, but contracts will
fragment, with more
multi-source deals being
signed.”
The report also finds
that clients will have
to learn to manage
outsourcing contracts
effectively, rather than
handing responsibility
to a vendor, which will
change the shape of the
client organisation as
well. More than 45% of
client companies in the
UK (nearly 70% across
Europe) said that they
had ‘weak’ or ‘medium’
skills available to them
to manage providers.
“Effective governance
is essential and is
neither understood nor
appropriately skilled in
most client
organisations,” says
Morris. “Working without
a proper decision
framework to define
policies, procedures and
resources can lead to
disaster. As the
outsourcing market
fragments, governance
will become more and
more important.”
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