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Outsourcing Sizes Up Smaller Deals

The number of outsourcing contracts topping $500 million is declining, which smaller contracts of less than $250 million are rising dramatically, an IDC report says.

Dramatic changes in IT outsourcing, primarily caused by more demanding customers, will place increasing pressure on outsourcing providers to adapt to the more competitive landscape, according to an IDC report issued Thursday.

The report on the top 100 worldwide outsourcing deals of 2005 describes an industry sector, which saw a slight 3 percent decrease in deals from $70.1 billion in 2004 to $67.9 billion in 2005. While the number of big deals between $500 million and $1 billion is declining, smaller contracts of less than $250 million are rising dramatically.

"It's clear that they (vendors) must change and adapt," said David Tapper, IDC's outsourcing director in an interview. "There is a shift from labor-centric contracts to ones that are more automatic and mimic the online model. Their business model will have to move in that direction. We're in the midst of a large global shift to a more complex environment."

Tapper said IBM Global Services was the largest supplier of IT outsourcing followed by EDS, BT Group, CSC, and T-Systems. Together, they accounted for 53.5 percent of outsourcing contracts in 2005.

"Customers are getting better at managing their suppliers," Tapper said. "They are going to specific (suppliers) for particular projects. They are parceling out work to different vendors." He noted that there has been a dramatic increase in deals under $250 million from 8 in 2004 to 23 in 2005.

The IDC analysis also found that the share of networking and desktop outsourcing contracts jumped from 14.6 percent of total IT outsourcing in 2004 to 32.4 percent last year.

"Most of that increase is in networking," he said. "There is a shift to wide area networks. And there's complexity involved in the shift to convergence." He noted that networking, which is increasingly becoming a commodity, also embraces new solutions like VoIP. Customers and outsourcing vendors alike must deal with the new requirements of networking.

The market research firm also found that the number and value of business outsourcing contracts declined in 2005 while IT outsourcing deals increased in value and number. Tapper said outsourcing suppliers will have to continue to address both business and IT outsourcing going forward.

Tapper said vendors will have to radically alter their delivery models. "They will now need to include more flexible and newer service capabilities along with globally based delivery, and develop dynamically different ecosystems of partnerships," he said.

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