Business strategies sideline mega-deals in favour of flexible outsourcing packages

The outsourcing mega-deal looks set to be a thing of the past as UK businesses chose multi-sourced IT strategies and the government demands smaller contracts...

The outsourcing mega-deal looks set to be a thing of the past as UK businesses chose multi-sourced IT strategies and the government demands smaller contracts from a broader set of suppliers.

Equaterra has just released the results of its annual survey of the performance of IT service providers serving UK corporates. This year's survey saw a propensity to multi-source, with most respondents using three or four suppliers compared to an average of 2.4 last year.

At the same time the UK government has made no secret of its desire to stop the signing of massive public IT contracts with a single supplier and is attempting to open up business to suppliers that have remained on the outside of public sector IT.

Click here to download a management summary of Equaterra's research on 2010 IT service providers. (Requires registration)

Mega-deals have been in decline and Lee Ayling, managing director at Equaterra, says there is evidence that they are now dead, as businesses increasingly use multiple suppliers. "Every year there is more and more evidence that multi-sourcing is the preferred way to buy IT services."

This is as a result of the standardisation of services and a better understanding of what is available among end user businesses. "There is more multi-sourcing because services are becoming far more standardised and it is easier for buyers to pick the best service providers for different services," says Ayling.

He says standardisation has brought with it lower costs, adding that businesses now have a better understanding of what different suppliers are good at. "The awareness of capabilities in the market is much better now than a few years ago."

Ayling says businesses have also improved how they manage suppliers internally and as a result are more confident to use more of them to access more skills and increase competition. "Outsourcing is today seen as a competency within businesses," he says.

Duncan Aitchinson, head of Europe at TPI, says mega-deals are already less prevalent and because the UK is a mature market this decrease will be more marked. "I do not think they are dead, but in a mature market where there is less new stuff to outsource there will be less mega-deals.

Robert Morgan, director at consultancy Burntoak Partners, does not think mega-deals are dead, but says they have changed to combine the flexibility of multi-sourcing with a single contract.

"Mega-deals are still around, but clients are spending a lot more time trying to develop contracts, known as head contracts, where one main supplier has the contract but clients can influence which suppliers are used for different services," says Morgan. This has the advantages of a mega-deal while retaining the flexibility that multi-sourcing can offer.

He says head contracts will typically be for seven years, whereas subcontracts within it might just last three years.

If the client wants things changed or wants to motivate a sub contractor in a different way, the nature of a head contract enables it to do so, says Morgan. Because services such as desktops have little differentiation it is easy to do so.

He says there are examples of this type of deal being put together in the utilities sector.

Nigel Hughes, director at Compass Management Consulting, says mega-deals have been in decline for a decade and for the past five years there has been an increase in selective sourcing, with a single supplier or internal organisation managing other suppliers. "There are certain things - such as enterprise architecture, security and contract ownership - that should be kept internal. Then there are some that should either be kept in-house or go to a single supplier such as governance, but after that there are lots of services that can be outsourced to different suppliers."

The UK public sector is a massive outsourcer and it has accounted for a large share of UK mega deals in the past. But this is set to change in the era of government thrift.

But the government has stated its desire to move away from massive contracts with single suppliers, which it sees as being inflexible and preventing value for money. This will inevitable lead to more multi-sourcing contracts.

The UK government has in the past wasted billions of pounds on failed IT projects that were signed with a sole supplier. To increase its choice of suppliers and spread the load of work the government is also attempting to open up the public sector IT market to SME suppliers, which have in the past found it difficult to access. The government has announced it will increase SME procurement to 25% of public sector contracts.

Similarly the government appears to be opening up to the Indian suppliers which have in the past found it difficult to repeat their UK private sector success in the public sector. Outgoing government CIO, John Suffolk, told Computer Weekly in October that he believes Indian suppliers should bid for more work.

Mark Lewis, head of outsourcing at law firm Berwin Leighton Paisner, says you cannot says that meg-deals are dead. He says there are some huge deals being signed, but that they are being structured in different ways.

"We have seen big deals that are multi-sourced, we have seen big deals that are multi-sourced but managed by one supplier and we have even seen large companies spliting up service stack procurement and multi-sourcing the individual services," he says.

"None of these models are new," he adds. He believes contracts that provide multi-sourcing managed by one supplier are "the best commercially."

He says the €3.2bn deal signed by E.ON with three suppliers is evidence that mega-deals are alive and well. "There have always been different ways of doing a big deal."

Could government thrift and increased awareness of supplier capabilities put a nail in the coffin of the IT outsourcing maga-deal, or is it just a matter of reclassifying big deals because businesess increasignly use different types of contracts and deal structures to do these deals?

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