Top outsourcing deals focus on business processes, 'multisourcing'

Large companies are changing the way they outsource.

An examination of the biggest deals shows more companies lately are inking business process outsourcing deals, in which they turn over responsibility for a functional area such as human resources or logistics to a vendor. The rise in BPO deals is offset by a decline in traditional IT-centric outsourcing services.

There are also more players competing for the biggest outsourcing deals, says David Tapper, director of IT outsourcing, utility and offshore services research at IDC. Tapper co-authored IDC's study of the 100 largest outsourcing deals inked in 2004, a 211-page report published late last month that digs inside key trends such as contract value, service type, vendor share and industry activity.

Put together, the total value of the 100 largest outsourcing deals fell slightly from $69.1 billion in 2003 to $68.3 billion in 2004. The minimum qualifying deal value rose 5% to $184 million.

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Large companies are changing the way they outsource.

An examination of the biggest deals shows more companies lately are inking business process outsourcing deals, in which they turn over responsibility for a functional area such as human resources or logistics to a vendor. The rise in BPO deals is offset by a decline in traditional IT-centric outsourcing services.

There are also more players competing for the biggest outsourcing deals, says David Tapper, director of IT outsourcing, utility and offshore services research at IDC. Tapper co-authored IDC's study of the 100 largest outsourcing deals inked in 2004, a 211-page report published late last month that digs inside key trends such as contract value, service type, vendor share and industry activity.

Put together, the total value of the 100 largest outsourcing deals fell slightly from $69.1 billion in 2003 to $68.3 billion in 2004. The minimum qualifying deal value rose 5% to $184 million.

BPO deals accounted for 25% of the total deal value, up from 15.2% in 2003. IT outsourcing deals lost share, falling to 75% of total deal value from 84.8% in 2003.

Companies are under pressure to lower their costs and increase productivity, which is driving some of the changes in the outsourcing industry, Tapper says.

IDC identifies three key business drivers for BPO adoption:

• Cost management. Companies want greater visibility over costs, a better understanding of cost drivers, and more effective management of operational costs associated with outsourced business processes, IDC says.
• Focus on core competencies. Companies are more strict than ever about focusing resources on activities related to their core mission and competitive strength and reducing involvement in operational technicalities.
• Risk management. Savvy companies are reducing their financial, technical and organizational risks by leveraging service providers' process expertise and dedicated capabilities.

Another key trend IDC identified is "multisourcing," a tactic that calls for divvying up work among multiple outsourcers. Multi-sourced deals accounted for $15.9 billion - or 23.3% - of the total value of the 100 largest outsourcing deals.

Among the enterprises that participated in more than one of the top 100 outsourcing deals is the U.K. Department of Health, which inked a $465 million BPO deal, a $1.6 billion IS outsourcing deal, and $1 billion network and desktop outsourcing deal. Other multisourcing enterprises on the list are Deutsche Bank, which split $2.575 billion between two vendors, and Bank of America, which divided $2.37 billion among three vendors.

Looking ahead, Tapper expects more companies will pursue a multi-vendor outsourcing approach -- for the short term at least. One of the most anticipated multisourcing deals could come from GM, which has a multibillion dollar outsourcing contract with EDS set to expire in 2006.

But Tapper doesn't see multi-sourced tactics persisting indefinitely. "I think it's going to continue for a while. I'm not a believer in it as a long-term model," he says.

For companies looking to execute broad transformations -- encompassing networks, applications and business processes, for example - the model makes sense. "Under those conditions I can understand why you have separate players focusing on separate areas," Tapper says. "There is a sense that you can accomplish more by breaking it down into parts, and there's truth to that." To expect one outsourcing provider to have the expertise and resources to transform all of these areas is unreasonable.