Demand for outsourcing rises in buyers' market

Businesses stepped up IT outsourcing during the first few months of 2012 to take advantage of competitive deals

Businesses stepped up IT outsourcing during the first few months of 2012 to take advantage of competitive deals.

Financial services companies are driving growth in a keenly priced buyers market, said Alistair Maughan, partner at Morrison & Foerster (MoFo).

Morrison & Foerster’s outsourcing practice reported a 20% increase in activity in the first few months of the year, as companies moved from single-supplier to multi-supplier deals.

"They can manage different service providers as long as they can play nicely together,” said Maughan.

Financial services companies are taking advantage of multi-sourcing deals to negotiate more competitive rates than are possible with single-sourcing deals.

There has also been renewed interest in outsourcing from property and pharmaceutical companies, he said.

“The story over the past four years has been renegotiation after renegotiation. How can we take the cost out by relaxing service levels? That seemed to flip around in the middle of last year, and now companies are making new investments,” said Maughan.

Outsourcing is likely to remain a buyers' market for at least six to 12 months, he predicted.

“If the level of activity continues and service providers become more confident, in six or 12 months' time, you won’t have the leverage," he said.

Government plans to hive public sector IT into mutual companies could absorb capacity in the market and push prices up, Maughan said.

Download Morrison & Foerster's report: Global sourcing trends in 2012

Risks of the Patriot Act

Businesses are raising questions over the impact of legislation that gives the US government access to data stored by US outsourcing companies.

The Patriot Act gives the US government the right to access data from European companies if it is stored by a US company or in a US datacentre.

“I was first asked this about two-and-a-half years ago, by a Germany-based utility," said Maughan.

“It happened to get quite worked up about it, so the US service provider had to work hard to ringfence the data to an arms-length subsidiary based in Europe,” he said.

However, as no cases have yet reached the course, the risks are more theoretical than actual.

Morrison & Foerster advised businesses to include a clause in contracts with US service providers, requiring them to fight any requests for their clients' data by raising European privacy rules.

But the Patriot Act is not a reason not to deal with US companies or to avoid structuring deals where data is held in the US, said Maughan.

“If you get a price in the cloud that is a tenth of the price of your desktop contract, and there is a risk of subpoena, then quite frankly with a theoretical risk, it might not be worth a candle,” he said.


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