IT Service Outsourcing Deal Volume On The Rise

While more IT outsourcing services deals are being signed these days, the news is not all good. That’s because the value of the contracts signed has fallen, according to a new report by Ovum.

The report revealed that the number of IT outsourcing services deals signed in the second quarter of 2010 was up from the first quarter, but that was to be expected considering the low numbers reported in Q1. However, the average contract value for deals signed in Q2 decreased.

IT services deals signed increased 14 percent in the quarter but total contract value fell by 14 percent decrease in the total contract value. The decrease in total contract value is part of a trend that Ovum has been seeing for at least 18 months, said Ed Thomas, an analyst at Ovum and the author of the report.

“It’s a long-term trend away from mega-deals. That’s something we’ve observed for the last 18 months to two years,” Thomas said. “There were much fewer outsource contracts, particularly in the private sector. That has been exacerbated somewhat by the economic conditions at the moment, but I think the trend is more longer-term that perhaps predates the recession.”

Eight IT services mega deals (defined as being valued at more than $1 billion) were signed in Q1, but only two were signed in Q2, Thomas said. That had a significant impact on the decrease in the total contract value reported by the industry. In fact, 88 percent of deals signed during Q2 were valued at $100 million or less.

The number of deals signed in Q1 hit a low that hadn’t been seen in nearly a decade, but the market bounced back a bit in Q2, he said. Ovum recorded 457 deals signed in Q2, an increase of 56 deals from Q1.

“I think first of all, it was a very low figure in the first quarter, so it was almost inevitable there would be some kind of bounce back,” he said. “I think what we did see was a higher number of private sector deals. The number of deals in the private sector increased by about 19 or 20 per cent from Q1, so there were more deals out there in the private sector, which pushed up the overall number of deals.”

The number of public sector deals held steady, especially in the United States, Thomas said.

“This was good news for vendors with a major focus on the U.S. government sector, notably General Dynamics, Lockheed Martin and SAIC,” he said.

The U.S. public sector accounted for more than 90 per cent of the market’s total contract value.

“However, analysis of both IT services deal signings and TCV in the first six months of 2010 reveals an extremely difficult start to the year for vendors. A total of 858 deals have been announced, down 13 per cent on the same period of the previous year and the lowest figure since the first half of 2007 when only 778 deals were tracked,” Thomas said.

Although the Ovum report doesn’t track specific IT services, Thomas noted that he has seen a resurgence of business processing outsourcing (BPO) services.

“2010 has seen a great deal of activity in this space relative to what we saw in 2009,” he said. The demand for BPO is increasing.