The future of mega-deals – divvying up the services cake

The mega-deal has been accepted by all but the most hard-headed in IT. But the days of a headline-stealing uber-provider may well be on the way out. Look out for a more sophisticated, more collaborative market, says Tony Hallett.

Mega-deals, outsourcing contracts that are typically in excess of E1bn, are surprisingly common these days. Most of the major IT services players have won a few over the past 18 months, though three or four vendors tend to hog the headlines.

Gartner recently studied 1,055 contracts awarded since 1988. Of those, just nine per cent are what it deems mega-deals (over $1bn) but they make up 66 per cent of the value of all the contracts.

There is little doubt – if you ask around – that this is certainly a growing trend. And a handful of UK public sector contracts up for grabs this year will only serve to keep the issue at the front of users’ minds. Consider in the UK alone parts of the NHS IT programme (worth a total of £2.3bn), Ministry of Defence overhaul (£5bn) and criminal justice system (£1bn).

The public sector is second only to financial services, according to the Gartner figures.

Nigel Roxburough, co-founding director of the UK’s National Outsourcing Association, said: “There’s no doubting the large deals are a thing of the future.” And he’s part of a consensus, certainly spanning the service providers.

Onlookers may tend to think of the market as dominated by a few big players. Four US giants in particular seem to crop up again and again – Accenture, CSC, EDS and IBM Global Services. But ask any of these, perhaps with the exception of the latter, and they will admit it is rare for one provider to be able to do it all.

HP, despite being an IT titan, is something of an upstart in outsourcing with a good chunk of its success coming from the services units Compaq bought when it acquired Digital. It made the headlines three times in quick succession earlier this year for sizable deals with Bank of Ireland, Ericsson and Proctor & Gamble.

Carlo Magistrelli, VP and general manager for HP Services EMEA, says: “The mega-deal trend will continue because of the savings it enables and the flexibility which users cannot have when doing it themselves.”

Indeed, cost-cutting is a reason cited across the board and there is also agreement that an improvement in economies around the world – something which must surely happen one day – won’t mean fewer mega-deals.

Other vendors, often according to their own strengths, cite other reasons for the growing number of mega-deals. The NOA’s Roxburough points out that when business processes are included – outsourcing a call centre or other entire departments, for example – deals invariably get bigger.

Other vendors talk about users transferring risk or gaining access to a range of best-of-breed skills unavailable in-house.

Ismail Amla, VP CSC UK, also points out that technology has also allowed companies to work together in ways that weren’t possible even in the 1990s. The ability to do offshoring or remote management of systems has come a long way.

But overriding the trend is the notion that mega-deals increasingly won’t be about a huge headline win for a single provider. The big boys have always sub-contracted but commonly haven’t wanted to talk about it, as if they were admitting to a weakness. Times are changing. Nowadays a move to ‘multi-sourcing’ – a term first coined by Ovum analyst Richard Holway – is accepted.

IBM, the biggest winner of mega-deals in recent years and the vendor with the widest reach and range of technologies, declined to comment for this article but it is the only major player who could claim to be able to provide end-to-end services with a straight face.

“They are the only ones even close to providing 75 per cent [of what’s required] of a mega-deal,” says Bob Fawthrop, director of LogicaCMG’s global outsourcing business.

And right now, despite its reputation, IBM holds less than 10 per cent market share – an unusual position for the leader in most technology markets.

Instead, an approach that relies on several key providers is driving mega-deals forward. High-profile IT directors such as John Yard at the Inland Revenue – known to have pressured EDS to use the best resources for different parts of that mega-deal - are one reason but vendors themselves realising the pros of multi-sourcing is another.

BT has grown its services business by concentrating on the communications component of contracts and often taking a supporting role to a lead provider such as CSC for large deals with organisations such as Marconi or Add comment  Print story with   Email story