| | By Mick James
Here at Top
Consultant we're big
fans of the TPI Index, a
quarterly review at the
outsourcing market. In a
world of dodgy surveys,
often backed by a vested
interest, TPI offer
facts. As outsourcing
advisers they get to see
anything between a
quarter and a third, not
just of historic deals,
but of the "pipeline"
going forward. The only
thing that makes the
figures hard to
interpret is the extreme
lumpiness of the
market—as the just
announced $1.1bn deal
struck by the Gap with
IBM shows.
However, even this
ties in with TPI’s
analysis, which saw a
rash of so-called
mega-deals occurring in
the last quarter of
2005.
On the whole though,
the trend has been
towards smaller deals.
Although 2005 saw the
greatest number of deals
struck—293 contracts
worth more than €40m,
compared to 269 in
2004—the total value of
these contracts was 5%
lower. I’d like to think
that at least part of | |
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| | this represented harder
negotiating by buyers,
who are now looking at
beyond the headline
savings to their
suppliers’ margins. I
was interested to read
in reports of the
Gap-IBM deal that over
the 10 years of the deal
Gap will “periodically
perform benchmark
studies ... to determine
whether IBM’s price for
the services is
consistent with the
then-current market
standards”. The days of
chucking your IT over
the wall and forgetting
about it are long gone.
We’re definitely into
act two of the
outsourcing drama. TPI
notes that the
first-generation deals
are all now coming up
for review—they expect
to see €36.5bn of
renewals in 2006 rising
to €40.8bn in 2007—over
a fifth of the total
market. Although
historically 90% of
renewals go to
incumbents this still
represents a huge
opportunity for the
“chasing group” as many
of these deals date from
a period where the
choice of providers was
very narrow. IBM and EDS | |
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| | in particular will have
to look to their
laurels, as it's clear
that clients are casting
the net wider. TPI
figures reflect this
diversity—in the $40m
plus bracket, 36
different providers
signed more than two
contracts, up from 29 in
the previous year.
Clearly this is partly
due to the fact that
outsourcing is becoming
attractive to smaller
and smaller clients.
There’s certainly
anecdotal evidence to
suggest that smaller
clients often feel a bit
overlooked in the Big
Six world. But the Big
Six’s share of the Top
50 deals also
declined—with more deals
going to European and
Indian providers.
The march of the
Indian providers makes
fascinating reading. In
2004 they took just 1%
of both contracts and
total contract value.
Last year this had
increased to 6% of
contracts and 4% of
value. It’s easy to see
why Wipro, for example,
was able to grow profits
by 24% this year.
Figures like this are
almost impossible to | |
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| | extrapolate, but I
suspect this is only the
beginning of the story
as far as Indian
providers are concerned.
They are still facing
huge inertial friction
with European and US
clients—the brands are
not well-known, they do
not have the client
contact based on
consultancy or IT
assignments. But all
that can change very
rapidly. Ten years ago
very few western
executives would have
had call to visit India.
Now, as a result of
outsourcing, many
companies have active
commercial links with
the Sub-continent. It’s
not scary or unknown any
more. That growing
familiarity with Indian
business culture may be
the biggest threat to
the dominance of the Big
Six.
TPI have some
fascinating data on
head-to-head competition
between Big Six
providers and Indian
firms. In deals above
€800m, the Big Six have
consistently won 100% of
the battles. In smaller
deals it’s a very
different story. Between
2002 and 2004, the Big | |
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| | Six won 94% of the deals
between €160m and €799m.
In 2004 this dropped to
71%; for deals between
€40m and €159m, the
figures are 83% and 58%
respectively. This has
clearly gone beyond
toe-dipping. And while
anything approaching the
billion-dollar mark is
still ring-fenced on the
principle of “no-one got
fired for outsourcing to
a Big Six company”, one
wonders how much longer
this will be the case. I
suspect that we are
nearing a “tipping
point” for Indian
providers—one
high-profile mega deal
could be all it takes to
push it over the edge.
The next two years
could therefore be a
tricky time for the Big
Six. If successful, they
will secure their legacy
income with loyal (if
more demanding)
customers for another
decade. If not, there
are plenty of firms out
there ready to pick up
the pieces...
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