What’s the real state of “transformational” outsourcing as we move into 2013?

Most outsourcing vendors trumpet that their engagements deliver transformation of their client’s business processes, the underpinning IT, or both. But sometimes the truth is, we have observed, rather more mundane.

PAC wanted to understand the real story, so we cast an eye over the 200 largest deals recorded so far in 2012 by the PAC Deal Tracker tool and tried to divine what proportion of deals can truly be called “transformational.” Our findings suggest that it is not so many as you might think.

Why this is important? The IT services industry has reached a level of maturity where vendors are fighting harder than ever to differentiate themselves from the competition. For some, the answer lies in ramping up their front end consulting capabilities in the hope that this will lead to higher-value, board-level engagements.

A lot of money is being spent on recruiting or acquiring teams of pin-striped process principals or seasoned industry domain experts (witness Infosys buying Lodestone for $350m earlier this year). So are the firms making these investments getting payback through the deals that buyers are actually signing?

For the purposes of this exercise, we’ve split out the contracts into three main categories: “functional”; “technology transformation”; and “business transformation”.

We labeled deals as “functional” if they are essentially “your mess for less” engagements, where the supplier takes on the management of the client’s IT/business processes and runs them more efficiently – leveraging offshore delivery and some automation. In this case, there is no major process or IT modernization/transformation at the heart of the deal.

We’ve classified deals as being “technology transformation” when they include a major step change in architecture, delivery model etc. For example, this could include the consolidation of disparate core banking systems on a new standard platform, or transitioning towards a cloud delivery model.

The third category we’ve used is “business transformation.” Now, these deals are often tricky to pin down, but what we were looking for was contracts where the vendor is supporting a major shift in business activity such as a change in operating model, or the launch of a new operation. Good examples from this year include:

  • Accenture’s deal with the State of California to implement a statewide health insurance exchange, which will enable Californians to determine their eligibility for subsidized health benefits, compare insurance plan options and enroll in coverage.
  • Atos’ contract with Transport for Greater Manchester to manage its new smart ticketing scheme, which will enable the use of e-tickets and contactless payment cards across multiple transport networks.

Of the 200 largest deals recorded up to November 2012 (all of which had a TCV in excess of $50m), only 12% could reasonably be placed in this latter category. The lion’s share was made up by “technology transformation” deals (40% of the total) and “functional,” which accounted for the remaining 48%.

So, what’s the trend? Well, if we look back at a comparable split from 2011, we reckon that just 9% of the top 200 contracts qualify for the “business transformation” label. Functional deals accounted for the biggest piece of the pie with a 47% share, with technology transformation deals representing the remaining 44%.

These numbers confirm our suspicion that only a small (but growing) amount of the very largest deals are true business-transformation engagements. It’s no great surprise that the market reality is a little less glamorous than the picture painted by the vendors’ press releases.

It’s also no big surprise to see that “functional” deals are accounting for the largest share of the big deals at a time of ongoing economic volatility, where engagements focused primarily on taking large amounts of cost (and often assets) out of the business are highly attractive.

Big outsourcing deals remain focused on delivering efficiency and technology improvements first and foremost. For suppliers, this means that scale, industrialization and technology portfolios and partner ecosystems are still powerful weapons.

We expect the balance to change gradually over time, as transformation replaces cost efficiency as a board level priority.