Mega-outsourcing deals back in vogue?

More $1B-plus contracts are in the pipeline

Following a nine-month decline, the number of mega-outsourcing deals -- those valued at $1 billion or more -- is on the rise as the economy improves and corporate customers grow more comfortable with transferring big chunks of their IT operations to third-party service providers.

According to a report that outsourcing advisory firm Technology Partners International (TPI) released Tuesday, six deals valued at a combined $11.2 billion were signed during the first half of 2004, five of them -- worth $9.2 billion -- in the second quarter alone. Those figures still trail the nine big outsourcing contracts valued at a combined $15 billion that were inked during the first half of 2003.

Big outsourcing contracts signed so far this year include a $1.1 billion extension of an existing deal between Bank of America Corp. and Electronic Data Systems Corp. to integrate FleetBoston Financial Corp.'s communication infrastructure into Bank of America's voice and data network (see story). Other deals announced this year include a 10-year, $3.7 billion agreement under which Siemens Business Services Ltd. will take over the technology arm of British Broadcasting Corp. (see story) and a $3.5 billion business process and IT outsourcing agreement between Capgemini and TXU Corp. that was signed in May.

The environment for such contracts is stronger than it has been since last summer, said Jack Benton, vice president of marketing for The Woodlands, Texas-based TPI.

For instance, Benton said his company is currently helping to negotiate nine megadeals, including six for North America-based companies and three for European firms. Benton estimated that there are between nine and 11 other large outsourcing contracts under consideration. That would bring the total in the pipeline to between 18 and 20 deals, with a combined value of approximately $20 billion.

By comparison, there were just 12 such deals being considered at this time last year, he said.

Of all deals still in the works, roughly half represent corporate customers in North America, while 40% represent European firms, and the rest are in the Asia-Pacific region, said Benton. Financial services companies are involved in about a third of the deals, he said. None so far include IT outsourcing arrangements by government agencies.

Benton cited an improving economy and a renewed willingness among corporate customers to invest in big outsourcing deals for the uptick.

Stamford, Conn.-based Meta Group Inc. has also noticed a rise, fueled in part by companies looking to save money, according to analyst Stan Lepeak.

He remains concerned about how long it will take to close some of the megadeals. "There's still a lot of confusion around how to address compliance requirements" such as the Sarbanes-Oxley Act of 2002, Lepeak said.

TPI's Benton said regulatory compliance requirements haven't been show-stoppers for big deals. Law firms that advise would-be outsourcing customers "are all up to speed on this," and the mandates haven't deterred companies from moving forward, Benton said.

Michael Boustridge, chief sales officer at Plano, Texas-based EDS, said the market for business process and IT outsourcing deals in the range of $100 million to $1 billion "is very robust." However, he said doesn't see a big market for $3 billion-plus outsourcing deals.

Robert Zahler, a partner at Shaw Pittman LLP who heads the law firm's outsourcing practice in Washington, D.C., said it's unfair for TPI to count mega-deals still being negotiated as there's no guarantee they'll be completed.

TPI "is making assumptions based on a percentage that it expects to be completed," said Zahler. He also questioned the quarterly and mid-year analysis that TPI conducts, since outsourcing tends to be seasonal.

"I like to think about how many deals get done in a calendar year," said Zahler. "There's a big push to get deals completed by year-end and to get deals started during the first quarter. In the summer, a lot of people go on vacation, so there are often fewer deals done then."

Copyright © 2004 IDG Communications, Inc.

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