There was a 10% fall in the value of IT services deals announced in 2012, based on new research from Pierre Audoin Consultants.
PAC’s Deal Tracker, which records all publicly disclosed IT services contracts (including IT and business process outsourcing, consulting and systems integration deals), recorded €48bn of deals in 2012, which represented a decline from the €53bn logged the previous year.
In fact, the value of deals has been on the wane for the last two years – the total was €85bn in 2010. And it is PAC’s belief that there is unlikely to be a major uptick as IT services becomes an increasingly mature market that is shaped by four important trends:
Discretionary and operating IT budgets remain under pressure: Economic conditions remain tough in all regions and clients remain wary about committing to long-term IT services programs. Experienced, battle-hardened buyers continue to negotiate more favorable rates from their suppliers, with existing deals typically being trimmed by 30-40% at renewal time. It is a highly price competitive market, driven by growing commoditization of areas of the infrastructure services space and aggressive use of low-cost resources to support applications and business process services. Vendors are having to work harder each year to automate and industrialize their horizontal applications and infrastructure offerings in order to protect their margins.
Deals continue to be more focused: The shape of contracts will continue to evolve as clients move away from broad-scope outsourcing deals and time-and-materials project services contracts, towards commercial models focused on delivering fixed outcomes and business value. While the percentage of deal values that is based on the delivery of business outcomes remains tiny compared to more traditional pricing mechanisms, there is clearly an on ongoing move to break monolithic programs into more flexible components. A good example from 2012 was Rolls Royce’s move from a single-source deal with HP to a multi-sourcing environment, with Capgemini appointed to the role of service integrator.
Cloud is slowly, but surely cannibalizing traditional revenue streams: Cloud will be a major driver of new project services spending in 2013 as clients look to lay the foundations for private cloud services, as BP is doing through a deal with T-Systems to shift 100,000 staff mail boxes to a private cloud infrastructure. But some organizations are replacing onsite infrastructure and applications with public or hybrid cloud delivery models which will increasingly marginalize the role of the traditional outsourcer – for example, the Environmental Protection Agency awarded CGI a $15m deal to provide infrastructure-as-a-service as part of the agency’s goal of moving 80% of its computing environment to the cloud by 2015.
Offshore delivery becomes standard practice: Offshore delivery is par for the course for large commercial sector organizations in the US and the UK. Although salary inflation is cooling some of India’s cost advantage, the country’s huge skills base remains hugely attractive, particularly as the leading suppliers develop increasingly sophisticated offerings. In the last 12 months, we have seen major new offshore-centric projects announced by Apple, ING and Shell. And low-cost delivery is becoming increasingly attractive to businesses in areas of continental Europe, and particularly in the Nordic region where major new offshore deals have been signed off in 2012 by Nordea, SAS, UPM Kymmene and TDC.
So what’s our feeling for how the market will play out in 2013? There will certainly continue to be a level of demand for big “your mess for less” traditional infrastructure and legacy applications outsourcing deals, which play to the strengths of the big guys. But we expect clients to look for more point solutions to address specific challenges such as upgrading from Windows XP, FATCA compliance, insurance policy administration platform consolidation and SAP upgrade testing (to name but a few projects that PAC has recently encountered).
In the next 12 months, IT services vendors will have to pick their battles a lot more carefully in order to address clients’ specific business pain points and to stand out in an increasingly competitive and mature market.