Single-supplier outsourcing can be attractive in challenging times

19 Oct 2010 View Comments
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DZ Bank
In recent weeks, details of hefty outsourcing deals have emerged at organisations such as DZ Bank in Germany

Amid the cataclysms that have shaken global economies, there is one dinosaur of the IT world that refuses to die out: the outsourcing megadeal. But while large single-supplier outsourcing deals may no longer be in fashion, their continuing survival may not be as anachronistic as it first appears.

In recent weeks, details of hefty outsourcing deals have emerged at organisations as varied as DZ Bank in Germany and Suffolk County Council.

Earlier this month, DZ inked a five-year deal with Atos Origin for mission-critical IT systems services covering server, storage and database management services, along with backup and archiving services.

Meanwhile, Suffolk County Council has embarked on a major outsourcing programme called NewStrategicDirection, which aims to shave 30 per cent off its £1.1bn annual budget. IT is expected to form a central plank of that programme.

Elsewhere, UK high street bank newcomer Metrobank has underlined the willingness in boardrooms across the UK to radically rethink IT provision. It revealed details of its multimillion-pound contract with IT services firm Niu Solutions. The firm will run Metrobank’s IT operations from its external datacentre.

Such large outsourcing deals would appear at first glance to go against the grain. So-called megadeals, which had their heyday a decade ago in the wake of the dotcom bust, were supposed to be on the verge of extinction, seen by many as too complex and inflexible to support today’s organisations – especially given that the economic recovery remains somewhat fragile.

Reducing risk
Today, multi-sourcing – where multiple suppliers are engaged – is often seen as the best way to reduce risk. But in straitened economic times, the attractions of a single-supplier outsourcing deal are easy to understand: you have one external partner to deal with and the reduced costs that come from the negotiation of an exclusive relationship.

So are megadeals set for a comeback? “Buyers are definitely continuing to look at reducing the number of suppliers they work with and to get more value from those suppliers,” said Kate Hanaghan, research manager at analyst K2 Advisory.

Those suppliers are as aware as anyone that the grim economy adds extra pressure to win deals – potentially offering better prices for single-supplier deals. Analyst Ovum recently reported that the number of European IT services deals signed in the first six months of this year was the lowest since 2002.

Separate research carried out by outsourcing consultancy EquaTerra confirms the difficulties facing services firms. It found that in the second quarter of 2010, global spending on IT outsourcing had stalled, with deals again thin on the ground.

“We’ve just completed our research into the third quarter and it’s looking much the same,” said Stan LePeak, managing director, global research at EquaTerra.

Does that mean the megadeal is back? Not exactly. For starters, says LePeak, it never really went away. As the outsourcing market has matured, IT leaders have become more sophisticated at negotiating deals, often meaning that they are comfortable dealing with multiple suppliers.

“Others are confident they have learned the lessons and can do megadeals without taking on unnecessary risk,” said LePeak.

Complex deals
K2’s Hanaghan agrees, but says that negotiations around the bigger deals have changed.
“We are seeing more of the larger deals being fixed to business outcomes and the level of complexity of deals has actually increased quite rapidly over the past few years,” she said.

Barbara Dossetter, delivery director at blue chip IT leader group CIO Connect, agrees. “When an organisation has had a positive experience of signing megadeals, they may be more likely to do so again,” she said.

But Dossetter says the biggest factor in deciding what sort of outsourcing deal best suits an organisation is how it fits with overall business goals.

“As contracts come towards their end, it may suit the business to bring the services back in-house, or it may become clear that other [parts of the IT function] should be outsourced,” she said. “Business priorities change over time and the criteria for what gets outsourced should reflect that.”

So for some, this may mean multiple suppliers engaged on delivering various parts of the IT operation; for others, a megadeal might be the perfect fit.

“Different companies take hugely different views on this,” said LePeak. “Some organisations regard functions such as direct customer interaction as strategic – things they have to do in-house. Others see that they can be handled better by third parties and are comfortable with their ability to manage that.”

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