BPO deal sizes shrinking

BPO deal sizes shrinking

The average deal size in the $600 billion outsourcing industry is shrinking as firms increasingly shy away from mega-deals in favour of multisourcing arrangements, according to research from analyst firm Datamonitor and BPO advisory group Everest.

Based on figures from Datamonitor's 'IT Services Contracts Tracker', the average size of contracts announced by IT and BPO services vendors in the first quarter of 2005 fell 18% to $68.9m compared to the year ago period. This means that average deal size has now declined for three consecutive quarters.

A total of 456 IT services contracts were announced during the first quarter of 2005, says Datamonitor, worth a combined total of $31.4bn. This represents a 13.7% decline on the first quarter of 2004 where the total value of contracts reached $36.4bn.

The number of contracts tracked in Q1 2005 was up 5% on the 435 recorded in the year-ago quarter, but the fall in average deal size suggests that clients are signing smaller, more focused deals with suppliers, says Nick Mayes, lead analyst for global computing services at Datamonitor.

"The decline in average deal value is partly due to the rise of multi-sourcing, where clients work with a number of best-of-breed IT services vendors, rather than a single outsourcer under a far-reaching mega-deal," he says.

Datamonitor tracked new business process outsourcing (BPO) contracts during the first quarter of 2005, worth a combined $6bn. Some 15 of the BPO deals had a value greater than $100m, the largest of which was Atos Origin's $1.6bn contract with the UK Department of Health.

However, half of the BPO deals tracked during the quarter had a value of between $10m to $50m, showing that most of today's BPO activity is happening around mid-size contracts, rather than mega-deals.

This trend is particularly evident in the fast-growing HR outsourcing (HRO) sector. Outsourcing advisory firm Everest Group found that the majority of buyers of HRO services are in the mid-to-large segment (with between 10,000 to 25,000 employees), rather than the large-to-mega segment (more than 25,000 employees).

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