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Outsourcing firms squeezed till their pips squeak

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IT outsourcers are facing a torrid time with nitpicking customers demanding more and paying less for their services. The numbers of deals are increasing, but they are worth less than before, and they don't last so long.

That's according to separate reports from IDC and Technology Partners International (TPI), an outsourcing consultant. Deals with a total contract value (TCV) of $1bn-plus are at their lowest point in four years, according to TPI. And deals over $50m are at their lowest point since the third quarter of 2002.

"There have been an increasing number of smaller, single process contracts compared with larger, multi-process contracts in recent years," Peter Allen, TPI partner, said. Its numbers are taken from its work with outsourcers and from publicly available information.

IDC has picked up on the same trend, recording a 3.1 per cent drop in TCV of the 100 biggest worldwide deals in 2005 to $67.9bn. Mega-deals, with $1bn plus TCV, and deals ranging from $500m to $1bn were both down. Contracts worth less than $250m more than doubled - 23 up from eight.

Deals are changing as the number of service suppliers increases, giving customers greater choice and so creating price pressure. That's becoming important as many early adopters of outsourcing renew their initial contracts, and are unwilling to become locked in again for long periods. Also, having shifted over people or assets, the need for an expensive contract lasting seven-to-10 years is gone. Companies are moving toward five-year deals.

According to Allen, service suppliers are now under pressure to demonstrate their value at an early stage. "They have to be clear in their service offering because contracts are not as open ended as they were in past. They need to demonstrate value early. After three years, businesses are in position to go another way," he told The Register.

The changes appear to favor India's suppliers, who are smaller, nimbler and more competitive on price than the big US and European rivals. Indian companies won eight per cent of contracts awarded in the quarter to September 30, up from two per cent last year. They also have 25 per cent of the TCV in application development and maintenance and are beginning to sign contracts in infrastructure.

IDC noted networking and desktop deals climbed substantially during 2005 from 14.6 per cent of total IT outsourcing deal value in 2004 to 32.4 per cent.®

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