Small Deals Still Rule

 
 
By Stan Gibson  |  Posted 2005-08-16 Email Print this article Print
 
 
 
 
 
 
 

Opinion: The dearth of big deals belies outsourcing's growth.

The trend to get away from big, honkin outsourcing deals first cropped up last year—and its still going strong, it appears. From the customers point of view, it makes sense to keep the deals small so that a customer is not completely beholden to a single vendor. Small deals make it possible to multisource—to draw on many vendors and, if possible, have them compete with one another for future work.

A joint research project by Datamonitor, a market analysis company, and Everest Group, an outsourcing advisory company, found that the average size of IT and business process outsourcing deals in the second quarter of this year was about half the size of contracts in the same quarter last year. In the second quarter of last year, the average deal size of contracts was $106 million; in the second quarter of this year, the average size was $56 million. The average deal size has declined for four consecutive quarters, according to the companies. The report found 447 deals worth more than $1 million in the second quarter of this year, compared with 416 million in the same quarter last year.

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Why the drop in size? Offshoring is a major factor, said the researchers, because deals signed by offshore companies tend to be smaller than those inked by domestic integrators. "We are seeing phenomenal growth of suppliers like TCS, Infosys and Wipro," said Michel Janssen, president of supplier solutions at the Everest Group.

Often, the offshore companies make their presence felt in partnership with U.S. providers. For Accenture, for example, having a component of the work done in India allows it to keep its costs low enough to make money on the smaller deals. "Accenture has historically stayed away from smaller deals," said Eugene Zakharov, an analyst with Technology Business Research, a consultancy in Hampton, N.H. Now, however, Accenture and others can vie with offshore companies by contracting with an offshore partner. "They must have an offshore component in order for the smaller deals to work," said Zakharov.

Accenture is not alone, the analyst said. "IBM Global Services and EDS [Electronic Data Systems] are doing exactly the same thing. They are trying to go down the value chain and take advantage of smaller deal sizes."

Indeed, EDS recently signed up Indian outsourcer Cognizant Technology Solutions as an offshore application development partner. In announcing the deal, EDS said the move was consistent with its strategy of providing lower-cost standardized services—and with using worldwide sources to provide those offerings. The centerpiece of this strategy is EDS so-called Agile Enterprise initiative, announced last year, in which the company builds partnerships with established players such as Dell, Cisco and Sun to develop widely applicable expertise.

The announcement fits with EDS reorganization of its application delivery function into units specializing in software platforms and industries, according to an EDS statement. Lakshmi Narayanan, Cognizant president and CEO, said in a statement he welcomed the opportunity for Cognizants development work to be bundled into large-scale IT outsourcing projects, "a market segment which we currently do not serve." So, it looks like a win-win trend for U.S. integrators, which can bid on more, smaller deals, and for the offshore providers that work with them. One result of this trend is that outsourcing in general and offshoring in particular may not seem to be growing as fast as they are. The source of this discrepancy is that small deals—those between $1 million and $20 million—are seldom announced. In addition, on deals that are announced, the U.S. provider may be named when, in fact, a significant amount of the work may be done offshore.

Out and about

Offshoring will be a key component in the extension recently signed by Accenture and The Dow Chemical Co. They agreed to continue their outsourcing relationship until 2011, under which Accenture provides business application development implementation and support services for Dow. Under the renewed pact, Dow is developing a shared services center in Shanghai, China, with Accenture, the companies said.

Stan Gibsons e-mail address is stan_gibson@ziffdavis.com.

 
 
 
 
Stan Gibson is Executive Editor of eWEEK. In addition to taking part in Ziff Davis eSeminars and taking charge of special editorial projects, his columns and editorials appear regularly in both the print and online editions of eWEEK. He is chairman of eWEEK's Editorial Board, which received the 1999 Jesse H. Neal Award of the American Business Press. In ten years at eWEEK, Gibson has served eWEEK (formerly PC Week) as Executive Editor/eBiz Strategies, Deputy News Editor, Networking Editor, Assignment Editor and Department Editor. His Webcast program, 'Take Down,' appeared on Zcast.tv. He has appeared on many radio and television programs including TechTV, CNBC, PBS, WBZ-Boston, WEVD New York and New England Cable News. Gibson has appeared as keynoter at many conferences, including CAMP Expo, Society for Information Management, and the Technology Managers Forum. A 19-year veteran covering information technology, he was previously News Editor at Communications Week and was Software Editor and Systems Editor at Computerworld.
 
 
 
 
 
 
 

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