Outsourcing Deals Alive and Well

The growth of the European market underpins a strong year for outsourcing.

Large outsourcing deals are alive and well, an outsourcing deal maker claims, even though statistics showing that growth take some deciphering.

The quarterly TPI Index Review, released by Technology Partners International, of The Woodlands, Texas, placed the value of outsourcing deals last year at $72 billion—the highest value in the last five years. However, growth during 2003 was only $800 million, and growth during 2000 was only $1.3 billion. Despite the appearance of flatness, Jack Benton, vice president of marketing for TPI, said the numbers show health, even robustness.

"People are saying the megadeal is dead, outsourcing is dead. Were saying, I dont think so," said Benton.

The reason: About 40 percent of the deals contain a sizable offshore component. Of that 40 percent, 38 percent of the total contract value is performed offshore. Because work performed offshore can be handled at far less cost than work done onshore, the appearance of flat growth belies significant growth in the work thats actually being done.

While some might assume that work is heading to India, Benton said his survey points elsewhere—to Eastern Europe. Of the American Big Six—Accenture, Affiliated Computer Services, Computer Sciences, EDS, HP and IBM—all but HP and ACS lost market share, said Benton. Meanwhile, European companies Capgemini, Siemens, Xchanging and T-Systems gained ground. Those companies generally send "offshore" work to Eastern Europe rather than to India, said Benton.

Another reason that outsourcing may be growing faster than the numbers indicate is that in many cases, clients are retaining responsibility for capital expenditures. Instead of including the cost of equipment in an outsourcing contract, inflating its value, that cost is being paid outside the deal by the customer.

"The service provider doesnt have to lay out the cash, and the equipment financing doesnt have to be factored into their pricing," said Benton. "Its more effective for the clients to manage that, and the service providers are quite happy not to do the capital outlay. It makes their deals look more attractive," he added.

In other findings, BPO (business process outsourcing) is on a roll, Benton noted. Last year, 33 percent of the contracts signed had a value greater than $50 million, compared with 22 percent in 2003. The reasons? Benton again pointed to the willingness of traditionally conservative European customers to sign BPO deals, now that the concept has been proven. He said BPO is also a popular cost-cutting tactic for companies that have recently merged.

Out and about

While big deals generally took a year-end vacation, the survey and report mill did not. In addition to TPIs work, Accenture reported nearly 60 percent of executives surveyed believe that outsourcing financial functions can help them comply with the Sarbanes-Oxley Act.

The main reason: Its easier for a service provider to stay on top of changes to tax codes and accounting rules. Executives also believe that an outsourcer can look at things objectively, with a clearer sense of accountability than in-house staff can. Sixty percent of respondents said outsourcing increases the rigor of business processes due to better documentation.

Despite that optimism, the survey found that 60 percent were concerned that an outsource provider would have thorough knowledge of the companys unique requirements and controls. The survey covered 203 senior executives at companies ranging in size from less than $500 million to more than $8 billion.

In still another survey, Janco Associates released the results of its 2005 Comparative IT Salary Survey. The data, covering the United States and Canada, showed a disappointing decrease in overall compensation and demand for IT pros. But those who remained in the industry did better, thanks to the proliferation of year-end bonuses. Median compensation in large enterprises was $80,276, a drop from $80,827 in June of last year. CIO pay at large enterprises grew 4.16 percent, from $162,827 to $169,601.

For those whose jobs have not been outsourced, life is still good, if not great.

Stan Gibson can be reached at stan_gibson@ziffdavis.com.


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