Multisourcing and the end of the mega deal

Julian Hewett, Chief Analyst

Integrated solution? Or best of breed? This argument has been with us since the beginning of the IT industry. And in the IT services market, the pendulum has swung towards the integrated outsourcing solution – the so-called mega deal – in which the prime contractor takes responsibility for everything. The largest of these can run to over $1 billion per year, or $5 billion over a typical five-year term.

We now believe that this era is coming to an end. Mega deals have been causing increasing problems for both customers and suppliers. The pendulum is swinging back to best-of-breed outsourcing. Ovum calls this ‘multisourcing’, as opposed to ‘onesourcing’.

In the early days of IT there was no outsourcing. Users employed every person and skill required. They then started to augment their own staff by using subcontractors. Outsourcing – or Facilities Management (FM) as it was then called – began in the 1970s. FM companies typically took over the running of mainframe systems, enabling users to concentrate on new distributed systems. During the 1980s and 1990s, the mega ‘Design, Build and Run’ outsourcing contracts appeared. The user gave responsibility for every aspect of IT to just one prime contractor. Today, Business Process Outsourcing (BPO) takes this a step further – the outsourcer may have responsibility for the business process as well as the IT. These mega deals have put enormous power into the hands of a few outsourcers.

However, onesourcing does not always work to the advantage of the customer. The original contract tends to be based on the business process and IT in place at the time. But all businesses change. Changes to the original contract are where the outsourcers make their profits. The customer has little choice but to pay up because there is no other realistic option. Even changing supplier at renewal time is difficult. According to research by Ovum Holway, 97% of outsourcing contract renewals were with the original supplier. We believe that lock-in is a big factor in this high retention rate.

Things are starting to change. We are starting to see contracts let on a best-of-breed consortium basis. Royal Mail is proposing to outsource its IT to a consortium lead by CSC that will involve Xansa in application management and BT Ignite Solutions doing the network management outsourcing. A new consortium - the Fusion Alliance - has been formed to challenge EDS and Accenture for the Inland Revenue Aspire deal worth at least £4 billion. The Fusion Alliance is lead by BT's Syntegra wih CSC managing the deskop, SchlumbergerSema the datacentres and, again, BT Ignite Solutions doing the network management outsourcing. In both cases the user will retain a strong relationship with each of the contractors ensuring they don't have all their eggs in one basket. Many other examples are starting to appear.

Of course, a consortium approach requires more management resources. Project management can remain in-house, or can itself be outsourced to a specialist project management company. All of this is common practice in the civil engineering industry.

We believe that the pendulum is changing direction from ‘onesourcing’ to ‘multisourcing’. This does not mean that the mega deal suppliers will suddenly disappear. But it does mean tougher times ahead for them. And better times for best-of-breed suppliers of IT and telecoms services.

Related Ovum Research

Holway@Ovum – An Ovum Advisory Service

Market Strategies – Ovum Consulting

Business Process Outsourcing in the UK: The Impact and Opportunity – An Ovum Report

IT enters defining phase of maturity – Ovum Comments (Archive)