The Outsourcing Service Provider Performance report, which canvasses the views of around 5,000 senior IT decision-makers at companies outsourcing all or part of their IT or IT-enabled business processes, this year highlights how nearly £7 billion worth of outsourcing deals are due for renewal by March 2008. The report’s author, outsourcing advisory firm Morgan Chambers, predicts that this will result in high-value contracts being broken up among a number of providers as UK companies tend to move away from ‘sole source’ deals, instead favouring ‘multi-sourcing’.
This is likely to result in smaller, more specialised companies picking up lucrative, shorter term contracts. Morgan Chambers say that this is likely to result in a period of consolidation, as the bigger players acquire smaller companies in the fight to retain existing business.
The report also demonstrates how companies are increasingly looking at outsourcing from a global sourcing perspective, dropping the ‘offshore’ and ‘nearshore’ labels. Where businesses do favour providers traditionally viewed as offshore, the emphasis is now less on price and more on innovation.
Dissatisfaction with current providers is also a reason for organisations’ lack of loyalty to a single supplier. Only 37% of companies involved in agreements worth more then £25 million are satisfied with the service that they receive, compared to 67% satisfaction amongst companies in contracts worth less than £3 million.
The average UK outsourcing contract is now worth around £28.5 million, says Morgan Chambers, with the largest contract due for renewal being the contract between pharmaceutical giant AstraZeneca and IBM, worth almost £900 million.
Despite being one of the least receptive markets for outsourcing deals, the UK insurance sector is finally being seduced by the benefits of handing its non-strategic IT to third-party service providers, says a new report by consultancy firm Pierre Audoin Consultants (PAC).
Insurance firms have typically relied on in-house capabilities, viewing technological know-how as a core component of their business and key to maintaining a competitive advantage over rivals. They have been less reluctant to outsource infrastructure, two good examples being IBM’s contract to provide hardware integration and maintenance to Norwich Union and Unisys’s deal to handle infrastructure and application management for Resolution Growth.
But compliance pressures and the maintenance of cost-intensive legacy systems will encourage investment in a wider set of externally delivered IT services over the next four years, says PAC. Outsourcing within the market grew by 9% in 2006 and is forecasted to reach double-digit growth over the next four years.
A large contributor to the expected rise will be business process outsourcing, which has been steadily growing in the insurance sector. There have already been some groundbreaking deals, including Tata Consultancy Services’ contract to take on the bulk of Pearl Group’s processing and administration – a deal worth £840 million over 12 years and forming the basis for TCS’s Diligenta insurance BPO unit.