IT outsourcing renewals lead to dissection of contracts

It has seemed quiet in the IT outsourcing market for quite some time now with big deals seemingly few and far between.

Last week Fujitsu signed a big deal with the Post Office where it is acting as a service integrator. Fujitsu is managing TalkTalk, Capita and MDS in a five year deal. Anthony Miller, analyst at Techmarketview, believes the contract could be worth £500m.

I was talking to a contact of mine this morning and he told me there are more deals being done but that they are smaller. This, he says, is because a lot of deals are up for renewal and businesses are using this as an opportunity to break contracts up. This is to reduce risks and could be a trend that was fuelled by the government’s strategy of reducing contract sizes.

In its latest report IT analyst firm Gartner firm revealed a 7.8% rise in spending on IT outsourcing services in 2011 compared to $228m 2010.

Bryan Britz, research director at Gartner said that deals are being shrunk as a result of the industrialisation of services and cloud services.  “Revenue cannibalisation resulting from client adoption of industrialised, and often cloud-based, services risks muting the growth opportunities for the ITO providers that are heavily weighted in infrastructure outsourcing.”

I spoke to Fujitsu’s UK head, Duncan Tait, today. I am going to write an interview piece but I also asked him about contracts being broken up.

He said it is a definite trend for taking larger deals and breaking them up. “This is both in the public and private sectors.”

“This is a trend that will continue for some time,” added Tait.

Perhaps it won’t end until every major contract has been broken up. But as everything goes around in circles I am sure in a few years businesses will start bundling deals back together to cut costs.