As companies attempt to implement more multisourcing agreements, the number of megadeals awarded to a single service provider has declined, according to Gartner. 

Megadeals are characterised as being worth more than $1-billion. In 2005, 11 outsourcing megadeals were awarded, a decline from 12 in 2004 and 16 in 2003.
Although the contract value of individual outsourcing deals continues to decrease, Gartner says there will be more of them and they will drive the outsourcing market to a growth rate of 7,3% from 2004 through 2009.
The uptake in outsourcing as a business tool will continue and ITO will experience mature growth in 2006 at 5,1%, while the less-mature BPO market will grow faster at 8,7% in 2006.
“This is part of a trend we see in IT outsourcing (ITO) in which comprehensive, end-to-end contracts signed with a single vendor are declining. Even some existing megadeals are being re-competed and broken up among multiple providers that bring best-of-breed skills,” says Kurt Potter, research director for Gartner’s IT services and outsourcing research group.
“Business process outsourcing (BPO) megadeals will continue to be the exception rather than the rule as most BPO activity will continue around smaller more-focused deals, primarily in the back-office and horizontal functions with human resources, finance and accounting.”  Gartner has maintained an Outsourcing Contract Trends Database since the early 1990s as a means of tracking the activity and trends in the outsourcing market for public and private organisations.
This database shows that Western Europe’s share of total outsourcing deals has steadily increased from 25,9% in 2003, to 31,7% in 2004, to reach the top region in 2005 accounting for 39,6% of the worldwide market.  From 2003 to 2005, the number of megadeals signed in Western Europe was more than 50% higher both in terms of the number of deals and the contract value. In total between 2003 and 2005, Western Europe had 21 megadeals compared to 14 in North America.  “In regions with mature outsourcing practices such as North America and Western Europe, the decline in megadeals is caused by a move to selective outsourcing – signing smaller deals with multiple service providers – and more experience in outsourcing in the largest enterprises, where that experience can help them pick and choose the best vendors and services at the appropriate price therefore reducing possibilities for megadeals,” Potter says.
Megadeals represent a significant share of total outsourcing contract value averaging $25,3-billion per year between 2003 and 2005. On average, megadeals represent 52% of publicly-reported outsourcing contract value, and represent more contract value than all contract value categories combined.
“Given that megadeals are set to decline in the near future, increasing numbers of outsourcing deals will occur in the $100-million to $999-million range. This is a consequence of a renewed service provider focus on the midsize market and will become the new battleground for the megadeal providers,” says Potter.
Contract term lengths are also on the decline. The average of length of an ITO contract declined from 6,2 years to 5,3 years from 2003 through 2005.
The average length of a BPO contract declined from 5,5 years to 4,8 years during the same period. When measured independently by year and type of outsourcing, the median length is consistently five years.
The largest BPO deals are trending longer than the largest ITO deals because of lack of standardisation and maturity in the market, which forces longer terms by service providers to recoup transition costs.
“The days of the 10-year outsourcing contract are numbered,” says Potter. “End-user organisations have tough experience from their first-generation outsourcing deals and learned how quickly their outsourcing contract becomes outdated.
“Declining asset lifecycles, constant business changes, cost, innovation and cultural/business fit are affecting the contract length in the life of an outsourcing relationship. Organisations want shorter contracts with flexibility that won’t lock them in.”