Outsourcing turmoil looms
UK businesses are facing outsourcing turmoil, with nearly £7 billion 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 identifies a clear trend away from sole source deals in the UK i.e. 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. This is likely to 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 £28.5 million, with the largest contract up for renewal being worth almost £900 million (a seven-year deal between AstraZeneca and IBM, which is up for renewal in February 2008).
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 and 42 per cent of clients respectively said they would definitely renew.
Phil Morris, CEO of Morgan Chambers, says: "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 clients 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, the market continues to grow, but contracts will fragment, with more multi-source deals being signed."
"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."
- Source: Outsource, Thursday December 14 2006