Renegotiations, Not New Deals, Drive Outsourcing Activity in Q1

Slide Show

12 Trends Shaping the Outsourcing Market

Rather than just seeking the lowest prices, buyers are relying on more sophisticated techniques.

One of the dozen trends included in my recent slideshow of 12 trends that are shaping the outsourcing market, contributed by the smart folks at consulting company TPI, was an increase in companies renewing, renegotiating or expanding their existing contracts. As TPI noted in its recently released Index of the Outsourcing Industry, restructuring accounted for almost half of the $16 billion total contract value for IT outsourcing in 2010's first quarter. Three mega-deal restructurings alone represented a third of that total.


Breaking from tradition, several of the larger deals were restructured well in advance of scheduled contract end-dates, Mark Mayo, president of TPI Global Operations, told CIO.com. The article offers three reasons for this unusual occurrence, all related to the tough economy.


First and most directly related to economic conditions, companies sought "more contractual and pricing flexibility from their vendors." Other companies went through mergers and acquisitions, and contract renegotiations are a given in M&As. (M&As tend to pick up in a poor economy when cash-rich companies can get great deals on struggling competitors, I'd note.) And changing business requirements led others to tweak outsourcing deals to better meet current demand. (Again, I'd venture to say the economy had a lot to do with these kinds of changes.)


The article touches upon another of the TPI-contributed trends from my slideshow, companies splitting up portions of their original contract scope and awarding it to other service providers. This is especially true in large IT outsourcing restructurings, specifically in the applications, desktop and network services areas. Indian outsourcing providers see this best-of-breed trend as a particularly hot opportunity, Mayo told CIO.com.


As noted in TPI's index, the renegotiation trend will grow even more in 2010, thanks to expiring deals worth some $12 billion in annual contract value.