New research by independent market analysts Datamonitor (DTM.L), has found that businesses globally dramatically increased their investment in major IT and business process outsourcing (BPO) initiatives in 2003. Despite a backlash against outsourcers following several high profile contract failures, Datamonitor’s IT Services Contract Tracker*, reveals the number of deals with a value greater than $100m increased 49% to 244. Those worth in excess of $1bn more than doubled to 29. According to Datamonitor this increase has largely been driven by new contract awards by public sector organizations such as the UK National Health Service and the US Department of Defense, which have brought in private sector specialists to upgrade their existing technology infrastructure. IBM Global Services took the largest share of major contracts in 2003 with 21%, whilst Computer Sciences Co and Hewlett-Packard made significant gains.
$119bn of major IT services contracts in total during 2003, which represented a 44% increase over 2002
Outsourcing attracted a lot of negative publicity in 2003, as clients including the UK Inland Revenue and the US Internal Revenue Service ran into problems with their incumbent suppliers. However, this has not deterred organizations from committing to bigger and longer deals. The UK Inland Revenue is a prime example. After ending a heavily criticized deal with EDS, the Government department signed a new $5.1bn deal with Cap Gemini Ernst & Young in December 2003, in what ranked as the year’s largest single contract.
Datamonitor tracked $119bn of major IT services contracts in total during 2003, which represented a 44% increase over 2002. The biggest spending sector was the central government sector where Datamonitor tracked $18.5bn of contracts, which was more than double the level in the previous year. The defense sector was the second biggest investor, with $18.2bn in deals during 2003.
Global contracts with an offshore delivery element in 2003 totaled $1.66bn
One clear trend is the massive increase in the use of the offshore delivery model, where clients source application development and management skills from low-cost countries such as India and China. Datamonitor tracked $1.66bn of contracts with an offshore delivery element in 2003, which represented a huge 890% increase over 2002. Companies such as HSBC and BT Group have come under recent fire for their plans to replace some IT and back office processing positions in the UK with offshore labour. However, Datamonitor found that only a very small amount of deals in 2003 involved offshore delivery – just 1.4%.
Nick Mayes, Managing Analyst for Global Computing Services at Datamonitor, comments:
“There was a big surge in the number of mega-deals last year. But the majority of them will not be as profitable for the services providers as those long-term contracts that they signed in the 1990s, as it has become a buyer’s market. Clients have been able to squeeze some big cost reductions out of their incumbent suppliers, which are also being held to increasingly tight performance targets.”
