Ralph Szygenda’s multisourcing contract may have caught the imagination of the outsourcing observers and stakeholders alike, because of its sheer size and the innovative collaborative model. But the $7.5 billion IT services contract awarded to six vendors on 2nd Feb. is by no means in isolation. It just gave a bigger impetus to the hectic deal-signing activities that have marked the first few weeks of 2006.

But the honor for the first mega deal of the year goes to IBM’s $1.1 billion, 10-year contract with Gap Inc. to provide mainframe, server, network, helpdesk and desk-side support services across the retailer’s North American stores and corporate locations. Outsourcing advisory firm TPI classifies deals with total contract value of more than $1 billion as a “mega deal.”

The two mega deals are supported by a number of $100 million plus IT-outsourcing deals, finalized in the first five weeks of 2006. And it may not be a mere coincidence that most of them came from Europe. The biggest of them was an IT contract bagged by Indian tech company HCL from U.K.-based specialist electric retailer, DSC International in which the Delhi based vendor would take over the entire IT organization of DSC. Reportedly worth $330 million (HCL has not officially announced the size of the deal), this is the biggest single contract bagged by an Indian company so far. Barclays also handed over a five-year contract to Getronics for a five-year, $240 million (€ 200 million) to provide desktop and application support to over 30,000 users, principally in the U.K. The other notable deal was a 10-year, $181 million (€150 million) IT contract awarded by Symrise, the world’s fourth-largest producer of fragrances and flavors, to Atos Origin that includes management of applications and IT infrastructure, consultancy, project activities and development of software applications.

Quite a few major American IT contracts announced so far have gone to EDS. These include two high-profile contracts announced in January — a 10-year IT-outsourcing contract with United Airlines and a multi-year IT contract with Sprint Nextel. Injazat Data Systems, an EDS joint venture also bagged a 10-year, $110 million IT deal from the Abu Dhabi Water and Electricity Authority in Asia. With a better-than-expected $3.8 billion deal with GM in February, EDS seems to be on a comeback trail. Or did you say — it is too early?

Other mid-tier Big Six company, CSC also announced a $27 million, 7.5-year contract with Pan American Life Insurance Co. for supporting IT services for the insurance firm’s U.S. and Latin American operations.

A Trend Reversal?

The spurt of contract activities is certainly good news for the outsourcing industry, especially as it comes after a particularly bad year. The year 2005 actually saw a 5% decline in total contract value, which stood at $75 billion, as compared to $78 billion in 2004, according to TPI. The advisory firm, which also tracks mega deals had said the year 2005 was particularly bad for mega deals. The entire year saw mega deals worth $28 billion. With the first five weeks seeing the signing off of two mega deals worth $8.6 billion (30 % of the entire value of the entire last year’s contract), the year 2006 certainly seems to be different.

The trends are doubly reassuring because of the surge IT outsourcing (as opposed to overall outsourcing, including BPO). Last year witnessed more headlines proclaiming IT contract reversals than new deals.

Does it mean that the trend has started reversing in 2006?

Well, not exactly. The fortunes of the outsourcing fraternity may have started a little earlier—in the last quarter of 2005 itself. According to TPI, the last quarter of 2005 saw a spurt in outsourcing contracts, especially of the bigger variety. The firm said six mega deals were awarded in this quarter, with five in December alone. Total mega-deal value for the quarter was US$11.2B, representing 40% of the full year’s mega-deal value. Also, December 2005 recorded the single biggest value in the last three years in terms of mega deals signed.

BPO Lives Up to the Expectation

According to TPI, younger cousin Business Process Outsourcing (BPO), which impressed with its performance even in 2005, and was instrumental in partially offsetting a larger decline in IT outsourcing, has continued its victory march well onto 2006.

The first five weeks have seen a number of major deals in this space too. Europe leads again, with the biggest BPO deal of 2006 announced so far being U.K.-based bank HSBC’s $442 million document based customer-communication contract to Communisis Ltd. that includes people and asset transfer.

Other significant deals include erstwhile GE subsidiary, India-based Genpact’s $60 million contract with German tech group Linde to provide finance and accounting BPO services to the latter; ACS’ three-and-a-half year, $56 million contract renewal with Aetna; Capgemini’s BPO deal with Zurich Financial (value unknown), Convergys’ customer-service contract renewal with DIRECTV (value unknown) and ACS’ contract with KeyBank for loan serving for the latter’s educational loans.

A Hectic Year Ahead?

While a good first month is not necessarily an indicator of a good year following, there are some deals already in the pipeline that makes the observers optimistic.

A few deals on the brink of getting finalized are, the proposed London Borough of Southwark’s plan to outsource its IT operations in a five-year deal, expected to be worth more than $52.8 million; BBC’s HR-outsourcing plans, for which the media major has already short-listed vendors; and a big $530 million outsourcing deal that Vodaphone is reportedly planning to finalize, which media reports say could go to IBM.

It is exciting times again — a long way from the supposed “doom” predicted by a few analysts, in 2005.