Mega outsourcing deals boom during recession

Demand for IT outsourcing services in UK will continue during the recession, a recent report from research firm Ovum said.

The UK IT outsourcing (ITO) market will carry on presenting opportunities for large providers, according to Ovum's report 'UK IT outsourcing: opportunities in a recession'.

But tough conditions could spell the end for many smaller and niche suppliers as opportunities fall into the hands of the largest players, said Ovum.

The ten biggest UK ITO providers have boosted their total contract value of deals signed in the first six months of the year by a notable 31 percent, according to Ovum’s research.

Mega-deals signed in the first half of this year include BT’s £500 million contract with the NHS for the National Programme for IT,IBM and CSC’s deals at the Government’s Identity and Passport Service, worth around £300m, and a £685m deal for HP-EDS at insurance giant Aviva.

“The UK public sector in particular continues to let significant contracts such as for ID cards, with others such as the Environment Agency still to come. However this is more a culmination of existing procurements than new initiatives," said John O’Brien, senior analyst and author of the report.

Financial services, pharmaceuticals/life sciences, retail and travel - all sectors under heavy financial pressure as a result of the recession - are also showing an active interest in outsourcing deals.

A recent spate of contracts, worth £20 million or more, include a deal between Carphone Warehouse and IBM, CSC at Virgin Atlantic, and with Xerox at nationalised bank Northern Rock, are encouraging signs of such activity coming to market.

“The UK ITO market has some residual opportunities that are reaching sign-off in 2009 – hence the continued buoyant demand in the first half of the year. But beyond that demand is holding up well as outsourcing becomes a top priority for many end users grappling with the impact of recession," said O’Brien.

However, while this is all good news for the top tier, the second and third tier players are struggling. What's more, the supplier landscape is consolidating, for example HP's purchase of EDS and Fujitsu buying out Siemens stake in its joint venture Fujitsu Siemens. As a result, available deals are falling into the hands of fewer and fewer players, which have immense spending power and reach, said Ovum.

Despite the demand, suppliers need to deep pockets and resilience to survive the current market.

Providing virtualisation and cloud computing or other approaches to drive out further cost for their customers, and restructuring contracts to provide more for less, are key to winning and retaining business.

This will be a challenge to even the most financially stable vendors and could spell the end for many second and third tier UK ITO market, according to Ovum.

Copyright © 2009 IDG Communications, Inc.

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