March 4, 2005

According to new research from AMR, the B2B outsourcing segment continues to run, but the number of large deals in IT outsourcing and BPO (business process outsourcing) is slowing down.

"The sweet spot today is $500M on down," according to AMR. "there is a new emphasis on carving up a large process and addressing its pieces in discrete, project-based chunks."

There are plenty of reasons why outsourcing is trending in this direction. Much of the impetus comes from customers who want to eschew the risky, locked-in, slower time-to-benefit nature of the mega-deal.

Meanwhile, from the outsourcer's perspective, AMR points out that "margins are higher" in the shorter deal and "The upfront investment required -- of the sort that hobbled EDS's Navy deal -- is much less."

AMR listed some other reasons as to why shorter deals are gaining currency:

1) "The impact when a new CIO comes in and pulls back an existing contract a la J.P. Morgan Chase is less debilitating for both sides."

2) "Even transformational and on-demand relationships suffer from the 'what have you done for me lately' syndrome."

3) "Users prefer to work with multiple service providers, and are getting better at it."

One consequence of changing conditions is that smaller and regional players have more opportunity. A good illustration of this is how Indian BPO company Wipro recently emerged on the heels of IBM and HP in the European services marketplace.

Source: Line 56