With as much as $100 billion of outsourcing contract due for renewal in the next two years, the incumbent vendors could lose their market share, says outsourcing advisory firm TPI. The Big Six –as Accenture, ACS, CSC, EDS, HP, and IBM—are together known, could see their market share falling, with IBM and EDS likely to be most affected, according to TPI. TPI’s analysis reveals that 325 deals are due for renewal during 2006 and 2007, representing over a fifth of active contracts. The Big Six are the incumbent service providers on 72% of the contract value to be renewed.
“Although historically, incumbent providers have tended to be retained almost as a matter of course, the increasing level and diversity of competition, coupled with a trend towards selective or single process outsourcing all mean that providers cannot rest on their laurels. Client retention will increasingly depend on an incumbent’s ability to offer a competitive proposition. This could mean significant changes in price and scope from the original contract,” said Duncan Aitchison, Managing Director of TPI, commented:
An examination of the deals on which the firm advised in 2005 reveals that over 70% of contracts were competitive – an all time high and up by over a third, from 53% in 2004. A higher percentage of offshore contracts were competitive (83%), and the Big Six’s share of this market is falling. In 2005 they won only 37% of TPI-advised contracts involving offshoring, down from over half (52%) in 2004.
These figures are particularly worrying for the Big Six as the offshore market continues to grow. Very little information is available on the breakdown of outsourcing between onshore and offshore operations. However, an analysis of deals on which TPI has advised (which represent nearly a third of the outsourcing contracts let in 2005) reveals that over half (52%) involved ‘global service delivery’ or offshoring in 2005, a record high and up from 40% in 2004.
Another challenge for the Big Six, and a particular opportunity for both Indian and specialist outsourcing providers, is the trend towards a larger number of smaller deals. 293 contracts were signed in 2005, more than in any other year. Of these 70% were small to medium sized contracts (those worth $50 – $200 million), up from 65% in 2004 and 61% in 2003. Whilst Indian providers rarely win deals over $200 million, below this threshold, in 2005 they were invited to pitch for 30% of contracts and went on to win 70% of these.
“When the Big Six and the Indian providers go head-to-head it typically occurs on smaller deals. Indian suppliers have been extremely successful in winning these deals and then growing the business through additional work orders. However, with both the Big Six and the Indian providers rapidly expanding their global operations to meet the increasing demand for offshoring, the intense competition in this market looks set to continue,” added Aitchison,
The trend to a larger number of smaller single function contracts and the increasing use of multiple providers is creating opportunities for a wider range of providers and driving increased competition, to the benefit of outsourcing purchasers and to the further detriment of the Big Six. 34 different providers signed Top 100 deals this year, up from 29 in 2004 and 20 in 2003. The Big Six won only 53% of the Top 100 deals in 2005, down from 57% in 2004 and 73% in 2003.
Similarly, the Big Six’s market share of major outsourcing contracts (those valued at over $50 million) fell to 43% in 2005, down from 49% in 2004 and over 70% back in 2003 and 2002. 20 service providers signed four or more major contracts in 2005, up by a third from 15 in 2004 and part of a steady upward trend.
