Multisourcing: Report Says Big IT Outsourcers Losing Ground

By CIOinsight  |  Posted 05-04-2006

According to a January report released by the Woodlands, Texas-based firm TPI, 325 IT outsourcing contracts (roughly 20 percent of all active outsourcing deals worldwide) will come up for renewal in the next two years, at a value of about $100 billion. At the moment, 72 percent of those contracts are held by six companies: Accenture Ltd., Affiliated Computer Services Inc., Computer Sciences Corp., EDS Corp., Hewlett-Packard Co. and IBM Corp.

But the report suggests that increasing competition among upstart outsourcing firms in the U.S. and abroad will radically change the outsourcing landscape over the next few years. Companies will be awarding fewer megadeals to giant firms, and will instead dole out smaller contracts to multiple vendors—in other words, multisourcing.

In support of its theory, TPI offers the following figures on the rise of multisourcing: Of the 293 contracts signed in 2005, 70 percent were small and medium-size contracts (between $50 million and $200 million), up from 65 percent in 2004 and 61 percent in 2003. Furthermore, the six largest outsourcers won fewer deals in 2005 than in previous years, snagging slightly more than half of the top 100 deals in 2005, compared with 73 percent in 2003.

This shift creates a great opportunity for smaller companies, says Brian Rogan, senior vice president of strategic business and marketing at Fremont, Calif.-based outsourcing provider Sierra Atlantic Inc. "Companies are still doing business with the large outsourcing firms, but they are adding to the mix some offshore providers and smaller niche players, companies that have expertise in a particular area like finance or manufacturing. Having several outsourcing contracts diversifies the mix and forces companies to compete more." In fact, according to a recent report by Datamonitor, India's five largest outsourcing players all saw significant increases in deals, increasing their combined sales by 35 percent, to $9.3 billion.

But multisourcing doesn't necessarily mean that the large outsourcing firms will lose big. "When contracts expire, most of them are renewed with the incumbent service provider," says Mary Lacity, professor of information systems at the University of Missouri–St. Louis and coauthor of the forthcoming book, Global Sourcing of Business and IT Services Palgrave, 2006). "If a company does decide to switch, it's often a remixing among the top suppliers."