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Outsourcing megadeals down in 2007

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As companies continue to move to using multiple providers for their outsourcing services, the number of reported "megadeals" awarded to a single service provider has declined. 

According to Gartner, megadeals are characterised as being worth more than $1-billion. In 2007, 10 outsourcing megadeals were awarded, a decline from 12 in 2006.
"The decline in reported outsourcing contracts can be partially explained by the fact that outsourcing is now Obusiness as usual¹ for many enterprises," says Kurt Potter, research director at Gartner. "There is more outsourcing activity, but fewer deals on average are reported and this creates the false impression that outsourcing is decreasing."
In terms of megadeal total contact value (TCV), the total for the 10 megadeals in 2007 was $12-billion, the lowest level reported during the last eight years, with the closest level being that of $20,3-billion in 2001. Average contract value (ACV) of megadeals also continued to decrease, from an average of $2,6-billion in 2006 to $1,2-billion in 2007.
"While further TCV erosion may be driven by the irreversible trends of global delivery and IT services industrialisation as many leading-edge organisations move into their second and third generations of IT outsourcing, they may be looking at deal expansion to include wider application or business initiatives," says Potter.
"Although these opportunities are likely to evolve from a single-provider to a multiple-provider engagement, in some cases, historical ties between provider and recipient may retain the potential for megadeals."
Of the TCV of all outsourcing deals reported in 2007, Gartner says megadeals represented 39,4% of the contract value and represented only 6,8% of the number of total contracts in 2007, down from 7,4% in 2006.
Although deals with less than $50-million in TCV continued to increase and reached 39,5% of the total number of contracts, they only represented 3,3% of TCV for 2007.
"Many providers are pursuing smaller contract strategies as a consequence of the new market realities, new competition and natural market pressures toward commoditisation, which reduces per-unit pricing. These strategies are often in the form of pursuit of smaller contracts from larger clients, or larger contracts from smaller companies," says Potter.
"Many clients want to test providers¹ contracting practices, capabilities and cultures before moving favoured providers into larger contracts, or organisations are using smaller doses of outsourcing to delay larger outsourcing adventures.
"Many providers are forced to pursue larger contracts to meet growth expectations. Despite this pressure, providers should continue to evaluate different or at least accommodate go-to-market and product portfolio strategies for smaller clients."
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. All of these contracts publicly disclosed their dollar value and the duration, as well as the nature of their services and the name of the client and the outsourcer.